Queen's speech (answer to address)
	 — 
	The Vice-Chamberlain of the household reported Her Majesty's Answer to the Address, as follows:

I have received with great satisfaction the dutiful and loyal expression of your thanks for the Speech with which I opened the present Session of Parliament.

Ordered,
	That Mr. Bob Ainsworth, Mr. Geoffrey Clifton-Brown, Mr. John Heppell, Rosemary McKenna, Mr. Patrick McLoughlin, Gillian Merron, Joan Ryan, Andrew Stunell and Sir George Young be members of the Committee of Selection.
	That the members of the Committee of Selection nominated this day shall continue to be members of the Committee for the remainder of this Parliament.
	That this Order be a Standing Order of the House.—[Mr. Bob Ainsworth.]

Theresa May: I am sorry, but the Minister really is digging his head into the sand and failing to appreciate what is happening out there—not just for pubs, clubs, restaurants and night clubs, but for village halls, sports clubs and community centres for which a fee of £180 is a significant sum eating into the money that they raise for local people. Will he not accept and come to realise that, with 54 days before the August deadline and, on his own admission, fewer than 10 per cent. of applications in so far, and in the light of all the burdens caused to local authorities and councillors, not to mention the problems of licensees many of whom will not get their applications in, he must take his head out of the sand, accept the obvious and extend the August deadline?

Derek Wyatt: On behalf of the all-party group on the Olympics, may I wish the delegation well when it goes to Singapore next week? When we have won, is it in the intention of the Secretary of State to hold an audit or big conference to explain to everyone who does not have a constituency in London how they can best benefit from the games?

Tony Baldry: What steps the Government are taking to ensure that the big lottery fund provides funding to organisations working in less well-known or understood areas.

Richard Caborn: We want to see all areas of the country and all sections of the population benefiting from the huge success of the national lottery. Lottery distributors need to respond to people's priorities, but must also be prepared to look at new things and take a little risk from time to time. The big lottery fund will be responsible for determining its own programmes and how they are delivered, and for making all funding decisions.

Tony Baldry: Is the Minister aware that, in and around Oxford, a number of medical research charities do invaluable work and that they are concerned that they will be squeezed out of national lottery funding because they are not necessarily nationally well known and their work is not immediately glamorous? How are such medical research charities going to be protected under the procedure of the big lottery fund?

Richard Caborn: First, health and the developments on the additionality side of that will obviously be part of the big lottery fund. The hon. Gentleman will probably have an opportunity to make an impact on this issue tomorrow on the Second Reading debate of the National Lottery Bill, a major part of which is about the development of the big lottery fund. We have given clear assurances to those who have been funded previously that they will be catered for in the development of the three into one and the big lottery fund. However, if the hon. Gentleman catches your eye tomorrow, Mr. Speaker, no doubt he will be able to underline that point.

Hugo Swire: So as better to inform us in advance of tomorrow's Second Reading debate, will the Minister state whether he believes in the Prime Minister's categorical statement back in 1997:
	"We don't believe it would be right to use lottery money to pay for things which are the Government's responsibility"?
	Given the new definition of charitable expenditure in the National Lottery Bill, what directions will he be giving to the big lottery fund and the distributors to ensure that the principle of additionality does not continue to be breached and that smaller and less populist charities will continue to get their fair share of lottery funding?

Richard Caborn: As I said, the debate on the new big lottery fund will take place tomorrow on Second Reading. We have reiterated—this came out clearly in the consultation—that additionality is one of the cornerstones of the lottery fund. Indeed, it will be a cornerstone and the heart of the Bill that we will consider tomorrow. We are not breaching that principle, and that was shown in the two consultations that took place throughout the whole country.

Peter Viggers: One point on which the Electoral Commission has reached a view is that voters should not be deprived of voting in person at ballot stations. I am also sure that the right hon. Gentleman's comments on the technique will be noted.

David Heath: Following on from the question of the hon. Member for Tamworth (Mr. Jenkins), there was concern about the integrity of the electoral process—in particular that of postal votes—during the recent election. Recommendation 11 in the Electoral Commission's excellent report "Securing the vote" is that the lists and records of absent voters—those who have applied for postal votes or a proxy vote—should be made available before the date of the election so that people can check whether they have "applied for" an absent vote. Has that received any support from the Government?

David Cameron: On a point of order, Mr. Speaker. Over the weekend, the Secretary of State for Education and Skills announced a policy of extended hours that could affect every school in the country. No one in the House has had the chance to ask any questions about it. Are you aware that this is the third example in a week of the Secretary of State ignoring this Chamber? She announced a massive change to the way in which are children will be taught to read, involving reviewing the national literacy strategy, and in response to pressure, she announced an audit of special schools, which will affect many constituencies represented in the House. So far, we have not had even a written ministerial statement, let alone an oral one. Have you had any approach from the Secretary of State about making a statement this afternoon? Should she not come here and spell it out?

Mark Francois: It is a pleasure to open the batting for the Opposition this afternoon on the first clause of the Finance Bill to be considered in Committee of the whole House.
	Several changes have taken place at the Treasury since the general election, so with your leave, Mrs. Heal, I shall begin with a few quick courtesies. In his absence, I welcome the new the Chief Secretary to the Treasury, the right hon. Member for Kilmarnock and Loudoun (Mr. Browne), who is now the other Browne—Browne minimus—at the Treasury. I congratulate the hon. Member for Wentworth (John Healey) on his promotion from Economic Secretary to Financial Secretary and wish him luck, but not too much luck, in his new role. Finally, I congratulate the hon. Member for Bury, South (Mr. Lewis) on his joining the Treasury as the new Economic Secretary. He will be my direct opposite number, and I look forward to shadowing him in what I hope will be a constructive spirit.
	Amendment No. 35 seeks to reduce the specified period in proposed new subsection 5H from one year to three months. Amendment No. 36 seeks to expand the range of charities that may claim gift aid on their admissions under subsection 5G to include those facilities which have
	"interactive experiments with an educational purpose."
	In addition, my hon. Friend the Member for Wimbledon (Stephen Hammond) is a new hon. Member, but he has had the gumption to propose his own amendment to the Finance Bill, which augurs well for the future. I look forward to hearing what he has to say, and I will seek to respond to his amendment in my winding-up speech.
	On a procedural point, as clause 11 deals with changes to the tax treatment of gift aid in relation to a number of charities, in the interests of transparency, I declare an interest as a member of English Heritage, the Natural Trust and the Essex Wildlife Trust. With specific regard to amendment No. 36, I also declare an interest as a member of the friends of the Royal Air Force Air Defence Radar museum at Neatishead in Norfolk.
	The concept of gift aid, which is at the heart of clause 11, was introduced by John Major when he was Chancellor back in 1990. Since then, it has helped to generate billions of pounds of tax-efficient donations to charity. Gift aid has been through a variety of changes since then, which, the Committee will be pleased to hear, I do not propose to apprise in detail now.
	This afternoon's debate directly relates to a specific measure in the Finance Act 2000 that had the stated aim of encouraging new donations to charity. To cut a long story short, those changes to section 25 of the Finance Act 1990 permitted charities specifically involved in the conservation of heritage property or the conservation of wildlife to begin to reclaim gift aid on admission charges to their premises. In that context, it is important to note that that outcome was not the Government's stated intention, but a number of charities sought to take advantage of it with the subsequent agreement of the Inland Revenue, which is an important point. Indeed, paragraph 3.12 of the Government's own regulatory impact assessment to accompany the proposed changes to the gift aid regime states:
	"Changes to the Gift Aid rules in Finance Act 2000 mean that heritage and conservation charities are acting within the terms of the law by seeking donations that give a right to free day admission. This has become established practice, and guidance produced by the Inland Revenue confirms it is within the terms of the existing Gift Aid legislation."
	It is important to establish at the outset that what the Government propose to change has become established practice over the past few years, and that the Inland Revenue fully acknowledges that.
	That brings me to the cost of these measures. In the debate on Second Reading, it was notable that when Ministers were pressed for the estimated cost of making the changes—that is, the amount of money that, in their view, the Revenue was losing, and that they wished to make up by amending the gift aid regime—they were noticeably reluctant to give that figure on the Floor of the House. However, if one looks into the detail of the regulatory impact assessment, as I have, it is clear that on several occasions the Government estimate that the amount of revenue in effect forgone by the Treasury is approximately £10 million. All public money is important—I would not deny that—but the Government are bringing in a change that will have a very significant effect on the charities and museums sector, particularly small and independent museums, and they must acknowledge that although there is not a vast amount of public money at stake here, it will necessarily have an important effect on the institutions in question.
	Following the Government's decision in December 2001 to grant free admission to 50 or so Government-funded national museums and galleries, many charities that do not receive subsidies took advantage of the gift aid provisions to allow them to continue to compete with neighbouring attractions, entry to which had become free to the viewing public. Thus the situation post-2000, which pertains today, has helped to maintain something of a level playing field between subsidised and unsubsidised charities and museums, even though the Government admit in their RIA that that was not originally their intention. Again, this particularly affects smaller independent museums which are highly reliant on admission fees as a source of their income.
	The reasoning behind the Government's proposals was, as they stated as far back as the pre-Budget report 2003, that gift aid had become, in the words of the Paymaster General, "a loophole", and that the facility was therefore to be withdrawn, even though the Inland Revenue had admitted to the museums and charities sector that it was perfectly within its rights in using it. Perhaps not surprisingly, that rapidly led to the Government getting into trouble with the charitable sector. Under a considerable amount of fire, not all of it very charitable, the Government began to back away and encouraged the consultation on the proposed changes. They came back with a modified scheme, which was presaged in pre-Budget report 2004 and is now contained in the Bill.
	The proposals do not abolish the ability of charities to claim gift aid on admissions—we concede that—but rather reform it, with conditions and, in fairness, in order to allow additional institutions to qualify to claim gift aid, albeit on the revised basis. Those new conditions are addressed by amendment No. 35. New subsection (5H) sets either of two conditions by which institutions can continue to claim gift aid. In essence, they can do so either by charging an additional 10 per cent. on the admission fee for those people who wish their payment to be reclaimed as gift aid by the institution that they are visiting, or by granting a right of free admission for a year in return for an admission fee being reclaimed for gift aid. However, having contacted a considerable number of institutions over the past week, it is clear that implementing the changes presents several very practical difficulties.
	First, there is a problem with the additional 10 per cent. provision. For example, several visitors who do not mind gift-aiding their current admissions fee may, to put it bluntly, be reluctant to do so if they realise that it will subsequently cost them extra to visit the attraction that they have come to see. One can imagine a family group being unwilling to pay, for example, an extra pound for each member simply to help the institution when they have come to visit the attraction itself.
	In addition, there is the problem of staff at the ticket desk having to explain the difference to each group of visitors as they attempt to pass through. I presume that the staff would be encouraged by the charity's directors or trustees to try to persuade as many people as possible to sign up. That might sound easy in theory but it could be difficult in practice for the ticketing staff, especially on a hot summer's day, with long queues waiting to get in, perhaps many containing impatient children, who have already pestered their parents senseless.
	There is also the additional cost for modified tills and accounting systems, compared with the relative simplicity of the current system, whereby visitors pay their money, fill in a gift aid declaration and go in. The Government's regulatory impact assessment assumes a 70 per cent. take-up of the facility but several institutions that my office contacted in the past week were especially sceptical about the matter.
	For example, Mr. Alan Bentley, the director of the Brontë Parsonage museum, points out in a letter:
	"I think it is very unlikely that we will be able to continue to use the scheme in the way that we do now as I do not think that many of our visitors will give the extra 10% and the need to allow 12 months entry undermines our membership benefits and so will need careful marketing to our members. Membership of the society is the lifeblood of the organization."
	Mr. Keith Merrin, director of Bede's World in Jarrow, makes a similar point in a letter. He states:
	"Our main concern about the changes to the scheme are that once again they will disadvantage independent museums such as ours who already exist in an environment that seems unfairly weighted against us. Bede's World does not receive any funding from DCMS nor is it part of the Renaissance in the Regions scheme which benefits many of the large local authority run museums in the region. As a result, the museum is reliant on charging admissions to visitors. The ability to reclaim Gift Aid seems to be one of the few areas of the funding system that favours a museum such as ours."
	He goes on to provide some specific criticisms of the proposals. He states:
	"We believe that the suggested changes to the scheme will significantly reduce our income from this source for two reasons:
	1. The simplicity of the scheme and therefore its popularity with visitors as it stands lies in the fact that taxpayers are being given a very straightforward proposition (that is to pay the same amount as they would have done but make it as a donation). The suggestion that in future they will be asked to pay a further 10% would, I believe, have a detrimental effect on the take-up and therefore our income."
	For good measure, he adds:
	"The museum already operates a season ticket scheme through our Friends association at a charge roughly double the admission price. As such the suggestion of giving annual membership for the price of a single admission would have a serious impact on this scheme and overall reduce our annual income.
	In summary, we do not feel the changes to the scheme as suggested would be of benefit to the museum and would favour a recognition that the scheme as it currently works is in fact of great benefit to museums like ours who in turn provide a huge service to the communities and economy of the country without the need for large amounts of public funding."
	That appears to me to be a reasonable presentation of the case.
	In case the Economic Secretary has missed the point, Frances Snowden, who is the development assistant at the Abbot Hall art gallery in Kendal puts it in another way in an e-mail. She states:
	"The former option"—
	that is, the 10 per cent. option—
	"requires that reception staff explain this complex system, and ask if the visitor is willing to provide a donation of 10% greater than the entrance fee. However well presented the case, all signs point to this being entirely unworkable, and the vast majority of visitors will not be willing to pay this premium on the entrance charge. The immediate loss to the Trust of Gift Aid money, based on this year's income, will be £53,000. For comparison, this equates to the trust's entire budgets for exhibitions at both Abbot Hall and Blackwell."
	So that we can understand what is at risk, she goes on to say:
	"The Education Department of the Trust provides inspiring workshops and free visits for children from all over Cumbria and from North Lancashire. This year, thousands of children have benefited from their work, and the Trust has taken on a new member of staff. Once again, this programme, at the heart of what the Trust aims to do, will be seriously threatened by a drop in expected income."
	To contribute to the debate, the industry established the Attractions Gift Aid Liaison Group, the AGALG, and I understand that it has had a dialogue with the Minister over this issue for some time. At the risk of embarrassing him, the reports from the group are that the Minister has conducted the negotiations in a civil manner and has attempted to take on board some of the points that the group has been making. I am not seeking to make an overly partisan point.
	I have, however, spoken to the chairman of the group, Mr. Ken Robinson, who was keen to stress that he is not anxious to be involved in partisan politics. He said that the group had reservations about the practical applicability of this option. He sent an e-mail, which reads:
	"The assumption has been made in the Regulatory Impact Assessment that a 70 per cent. take-up by donors . . . would mean that there would be no net loss caused by these changes. It is the general opinion of potentially eligible Attractions that this level will not be achieved on the proposed future terms, and would only be possible at many Attractions if additional benefits can be persuasively offered."
	Overall, among the institutions which my office has contacted over the past week, there was comparatively little enthusiasm for the additional 10 per cent. option, if I can give it that name.
	I move on to the option of free admission for one year. It, too, presents a number of difficulties, to which I have referred in several of the extracts that I have shared with the House. The principal problem is that many charities that qualify use annual admission as an important part of their membership campaigns. Being able to achieve the same benefits simply by visiting the institution once would, in effect, tend to undermine that approach.
	Helen Toolan, the museum curator of the Murton Park museums—a group of museums headquartered in York—had the following to say:
	"By continuing with Gift Aid in its new guise visitors who participated in the scheme would then be allowed free entry to the museum for the coming year, this is an impossible situation, which would mean the loss of substantial income for the museum that it currently has from its admissions. If Gift Aid were to change, it would mean two things: firstly, smaller museums would not be able to afford to participate in the scheme because of the increased cost to the visitor in admissions and secondly a loss of much needed income that Gift Aid currently provides."
	Diane Perkins, the director of Gainsborough's House museum in Sudbury, has the following to say:
	"In direct response to (5H) . . . To give the right of admission for the whole year for £3.50 would dramatically affect our income—many people repeat visit during the year to see our changing exhibitions and attend events. It is most unlikely that visitors would choose to give an extra 10 per cent. just so that the charity can reclaim the tax. It would also be very difficult to explain and complicated to administer."
	She adds:
	"Having been already adversely affected by the change in VAT Cultural Exemption rules in June 2004 which will cost the charity about £10,000 over the next two years, we are dismayed at this second tax change within 10 months. Rather than Government's tax changes helping small charities to exist, they are actually causing considerable financial difficulties, which will result in reduced performance and services to the public through no fault of the organisation."
	I think that the director is seeking to make an entirely reasonable point.
	Amendment No. 35 seeks to reduce the amount of time for which the charity would have to allow free admission down to three months. This would be better because it would provide some sanction over the current situation, but it would not undermine the attraction of annual membership, which so many small and independent charities have assured us is extremely important to their revenue stream.
	That point is also supported by the Association of Independent Museums, which, I believe, has also been involved in dialogue with the Minister. Bill Ferris, AIM's chairman, says:
	"Many charity museums have effective and well developed annual memberships (friends) schemes. A reduction to 3 months in the eligibility period would prevent conflict with the existing schemes."
	I would therefore ask the Minister, who has already spent considerable time on this matter, to consider seriously amendment No. 35. It allows some modification of the scheme to protect revenue, which we understand that the Revenue was seeking to do all along, but not to the point at which the annual visiting rights included in many memberships packages, on which independent museums rely, are undermined. It is also important to remember that such museums are competing daily with other larger museums, regional or national, which effectively receive considerable subsidies and to which potential visitors can go for free.
	In the six months or so during which I have shadowed the Minister, he has normally played a pretty straight bat. Therefore, if he can assure me that the Government will consider the matter again, and come back with something new on Report, I assure him that I will not press the matter further today. If he is unable to offer any concession, however, or even the prospect of a concession on Report, we might have to test the will of the Committee in the Lobby. I have done my best to present that case, and I hope that he will give it a fair hearing on behalf of all the independent museums and charities that are clearly concerned about the matter.
	Amendment No. 36 relates to the types of charities and institutions that might in future qualify for gift aid on admissions charges on the revised basis. I should explain to the Minister and the Committee that we have tabled this amendment to try to elicit the Government's thinking on a specific matter, including the reasons why they came up with their list, and I hope that he will appreciate that when he replies. The list of those bodies in subsection (5G) is expanded beyond the original two categories, which I mentioned in my opening remarks, to include: buildings, grounds or other land, plants, animals, works of art—but specifically not performances—artefacts, and property of a scientific nature. We welcome that in principle, but it would be helpful to have some idea of the anticipated cost of the measure, at least in broad terms. In the regulatory impact assessment, the Government gave their anticipated cost of the 10 per cent. provision for charities. We would now like to know what the Government think that widening the list will cost them. The RIA suggested that it would be broadly revenue-neutral, and we would like to know whether the Government hold to that view. As we had no figure on Second Reading, it would be helpful if the Government provided at least some figure in Committee this afternoon.
	We would also like some clarification on the status of voluntary donations with regard to clause 11. Our understanding is that the provisions in the Bill will not apply to voluntary donations, and for the avoidance of doubt, we are not seeking to ensure that they do. To take one example, many cathedrals do not charge visitors a formal entrance fee but have a collection box with a notice encouraging visitors to chip in a certain amount. Clearly, that is a voluntary donation, and clarification that the new more complicated rules will not apply to them would be welcome. I am sure that Ministers do not wish to provoke divine wrath with their measures, so perhaps they could reassure all of us on that point.
	In addition, some information on the operation of the proposed definitions would be useful, not least to those who operate museums that might qualify. A number of people who might have seen the provisions in the Bill, and the list of supposed new categories, will be wondering whether they might qualify. Perhaps the Minister could comment on how the Government intend to advise museums of their status, one way or the other, and to promulgate information so that potentially qualifying museums might have a chance to find out whether they will be able to take advantage. To give just one specific example—this is why I declared the fourth interest—would military museums, which are not historic buildings in their own right but which display military memorabilia, be covered under the heading of displaying artefacts?
	In amendment No. 36, we seek to widen the proposed list further by including
	"interactive experiments with an educational purpose".
	Our definition of such facilities would be museums that have invested in interactive displays aimed specifically at the education of their visitors rather than being there simply for their amusement. A theme park, for instance, would not qualify on that basis, but a local history museum that had produced an interactive display representing local conditions through the ages would.
	It would be helpful to know more of the Government's thinking on all that, and to know how museums that think they might qualify could go about obtaining a definitive decision. The proposals are not currently due to come into force until April 2006, so there is time, but it would help those in the sector who read the report of this debate to have a clearer understanding of where they can go for a workable definition. I look forward to what the Minister has to say. I also look forward to hearing from my hon. Friend the Member for Wimbledon (Stephen Hammond), and indeed from other Members.
	During our consultations over the past week or so, we have found some museums and charities that were unaware of the proposed changes, despite the obvious work of the representative groups. That in itself is slightly worrying: there is a risk that some smaller museums whose representatives may not read the Finance Bill with the alacrity of other people in the country will be caught short. As the revenue is important to them, that would be a shame. I hope that the Government will deal with the position, if they are determined to press ahead.
	I ask the Minister to give serious consideration to, in particular, amendment No. 35. It allows the Government to achieve what they want to achieve, in part, but it also hopefully removes the threat to the viability of some smaller independent museums that do not rely on Government or regional subsidy to remain in business, unlike museums that are effectively free at the point of use.
	With that genuine plea to the Minister, I shall end my speech. I shall listen carefully to what others have to say.

Stephen Hammond: I declare an interest, as a member of the Wimbledon Society, which has a small museum.
	I wish to speak to the amendment that seeks to extend the definition of who can accompany a donor under gift aid in subsection (5I)(a). Last week on Second Reading I mentioned a number of small museums in my constituency, and also the Wandle industrial museum, which held an exhibition on Saturday. The chairman of its board of trustees is the Reverend Andrew Wakefield. It was somewhat surprising, therefore, to find that the board was sponsoring an exhibition on Nelson, especially as it featured the ménage a trois in which he lived in Merton. [Interruption.] For the benefit of the hon. Member for Rhondda (Chris Bryant), may I say that Nelson lived with Emma, Lady Hamilton, who was married to someone else at the time? It was odd to find a reverend member of the Church sponsoring such an exhibition.
	The industrial museum is exactly the sort of small museum covered by the Bill. I asked Mr. Wakefield whether he had had a chance to read the report of last week's Second Reading or had heard anything about the clauses that were being suggested. It seemed that, like those mentioned by my hon. Friend the Member for Rayleigh (Mr. Francois), he had heard nothing, and nor had he had a chance to consider how the provisions might affect the museum.
	On Second Reading I commented on the current position. Subsection (5I) explains that "right of admission" means a right of admission
	"of the person who makes the gift or of that person and one or more members of his family".
	That covers a number of circumstances: a parent taking a child; a parent taking another family member; and a parent taking a family member, plus certain other family members.
	However, a parent's taking a group of children to a small exhibition or museum is currently disallowable under the gift aid clause. Given the many different circumstances that can arise, it is sensible to widen the terms of that clause, which is what the amendment seeks to do. The ability to make a donation should surely extend to everyone in the donor's party, and the amendment would remove the anomaly so that the whole party would be covered by the gift aid provision. Inserting "accompanying" would also ensure a link between the principal person and the group itself, instead of a spurious association. I accept that figure of 20 to which the amendment refers is an arbitrary one; none the less, that figure would cover most of the circumstances to which I referred earlier, such as a children's party or a local group or society trying to enter a museum. I hope that the Minister will consider accepting the amendment, which would simply clarify matters and allow a number of perfectly innocent people who wish to be admitted to be covered by the gift aid provisions.
	I want to say a little about the amendments moved by my hon. Friend the Member for Rayleigh, which I hope the whole House will welcome and commend. When I spoke to various people after last week's Second Reading, it became clear that the one-year rule will create real problems for those who have established friends' groups for small industrial museums. Such groups often have a right of admission of a year. Unless the provision is amended, it would be rather odd if someone actually wanted to become a friend of a museum, instead of just paying their donation on the way in. Changing the period from one year to three months seems an acceptable idea that would provide valid support for museums.
	On Second Reading, I referred to interactive displays. I have a child who regards viewing museum displays as a rather restrictive pastime and who is keen to take advantage of the various interactive hands-on displays. There is no real purpose to confining the current provision to viewing alone. Amendment No. 36 also refers to the "educational purpose", and I hope that anyone who enters a museum would regard doing so as educational. I hope that the Minister will accept the amendment.

Stephen Hammond: I can give two practical examples. The museum that I visited on Saturday contains a working scale model of a mill. Children can look at it, move it around and remove and replace its various parts. Another display included various panels that people can touch, with lights indicating different results. Instead of simply viewing the display, they can press buttons and involve themselves in interactive way. As I understand it, the amendment allow such circumstances to be covered.

Susan Kramer: I shall speak primarily to amendment No. 35, but I shall also say a few words about amendments Nos. 36 and 1. I declare my various interests, which I discovered, once I started writing them down, are more extensive than I had realised. They include English Heritage, the National Trust, the Tate museum and, in my own constituency, Barnes wetlands and Kew gardens, some of which might be beneficiaries of the revised gift aid programme.
	I thank the Minister for recognising that many charitable attractions use the provisions on gift aid and admissions not as a loophole, but, with the encouragement of the official guidance of the Inland Revenue, as a justified way to enhance their viability. For many small museums, including the Richmond and Kingston museums, gift aid has played a significant role, especially when local government is frequently cutting funding. With competition having intensified from national museums—now free of charge—the difficulties of the smaller museums have worsened, and gift aid provision has proved a lifeline. That is why the proposed changes are of such concern.
	I accept the fundamental notion that for gift aid to apply, it is right to ask for a little something extra to be provided, rather than simply having admissions converted into a donation. I accept that in principle, but I am concerned about the provisions that are intended to give effect to it. I have received from Ken Robinson, and from people on the ground, representations saying that the difficulty of explaining the need to put an extra 10 per cent. into the pot so that payment qualifies as a donation is a challenge for many small museums, particularly where the admissions person is a volunteer—someone passionate about the collection, but not necessarily able to sit down and take someone through the complex details of adopting route A or B and explaining the differences between them. That is particularly significant when there is a fairly long queue. From a practical point of view, it provides a challenge particularly for small museums, but also perhaps for the larger ones.

Chris Bryant: Surely the point is that the provisions are about financial dependents, and that cannot be extended to any 20 people one may choose to gather and call members of one's family, unless one is able to prove that they are financial dependents. That would drive a coach and horses through the finance legislation.

Susan Kramer: My interest is in trying to draw up a provision that will encourage people to bring in youngsters, which frequently means a group of youngsters, wherever possible. If there were something in the provision that did that, I should be entirely satisfied that the clause contained all that I wanted to achieve.
	Finally, on amendment No. 36, although I do not pretend to understand the difference between an interactive project and an interactive experiment, we can probably all understand the sense of those words. An interactive approach is being adopted at more and more charitable attractions to engage youngsters. For example, at the Barnes wetlands project in my constituency, and indeed my neighbourhood, an attraction is being set up where youngsters can become engaged through climbing, guessing, touching and drawing to work through issues relating to wetlands, such as climate change and its impact on ecology. Such strategies are being used to draw young people to various attractions. That is important, so there can be nothing disadvantageous in adding the amendment, it can be only advantageous.

Doug Henderson: I have only one short point to make, but first I declare an interest as a member of the National Trust and a proud member of Beamish, which is a marvellous museum in County Durham.
	As has already been said, small museums, as well as private and specialist museums, which often have charitable status, have to compete with the state's museums, which are free—although I completely support that. However, that situation affects museums such as Beamish, which is quite a large organisation.
	As the Financial Secretary knows, the practice has developed over the past three or four years of paying gift aid with membership subscriptions. The hon. Member for Rayleigh (Mr. Francois) referred to that in his introduction. People standing in the queue eating their ice creams at Beamish, or at the ticket desk, get leaflets about gift aid so they know about it already. When the Government are considering the small print, I urge them to make it clear that we are not worsening the current position but that the measure merely establishes in law rights that are currently applied. I hope that we can mount a campaign on that.
	I understand why the Opposition are raising those points, because various museum groups have also raised them, but the important thing is that the Government respond to what is happening and maintain the situation. We must get that message across. I ask the Financial Secretary to be generous in considering some of the suggestions. The suggestion made by the hon. Member for Wimbledon (Stephen Hammond) was a good try, but it would create so many anomalies in our tax legislation that it cannot be a runner.
	I do not know whether the period should be 12 months, three months or one month, but I rather suspect that, whatever the provision, it will be theoretical. Museums are ingenious and they can usually find ways of getting round the regulations that we establish. One of the ways of doing that—it is quite legal—is to give an annual member privileges that someone who is the member for a day or three months does not have. For example, an annual member may be able to get the kids in a bit cheaper. There are ways in which the institutions can respond to the points that have been made.
	I am not absolutely stuck on the 12-month rule, but I think that it is fairly reasonable. Although the points made by the Opposition sound reasonable, they would not apply to most museums. If one joins the Beamish, it is a 12-month deal. Most people visit once a year, but I recognise that some go more frequently. However, the revenue for gift aid comes from those who go once a year.
	I hope that the Minister will be generous in his response and make it clear to museums that there will be no worsening of conditions.

Philip Dunne: I support amendments Nos. 36 and 1. In common with many other Members, I declare an interest as a member of the National Trust—I am a life member—and I am expecting to become a trustee of the Ludlow Town Walls trust. I am also a member of the Hereford Cathedral Perpetual Trust.
	I support the remarks of my hon. Friend the Member for Rayleigh (Mr. Francois) on amendment No. 36, but ask the Minister for clarification in relation to one of my interests. That may not be good form, but I shall ask the question anyway because the position is not clear. Under the proposed new paragraphs (e) and (f) to section (5G) of the Finance Act 1990, I wonder whether the world-renowned Mappa Mundi and its associated chained library that reside in Hereford and were constructed in a purpose-built building put up by the perpetual trust a few years ago qualify as either "works of art" or "artefacts". If not, I am sure that the trust would establish an interactive educational exhibition to ensure that they qualify if our amendment is accepted. I should point out that the constituency of Ludlow is in the diocese of Hereford, so I am not interfering in neighbouring Members' affairs.
	Amendment No. 1, which was tabled by my hon. Friend the Member for Wimbledon (Stephen Hammond), is eminently sensible. The leaders of many of the groups that visit museums pay the admission fees on behalf of the group as a whole. It would be quite wrong if groups could not benefit museums by being able to take advantage of the gift aid provision.I should perhaps also declare that I am a member of Ludlow Civic Society and the Leintwardine history group, both of which organise group visits to areas of historic interest.

Helen Goodman: We have heard much about queues in the debate, but how would this amendment stop people—some would be top rate taxpayers; others would not—going along a queue and saying that they were all part of a group?

Chris Bryant: The hon. Gentleman is really putting a question to the Minister, not me. As he was speaking, a picture of the Queen paying admission to go into Windsor castle was going through my mind. However, she is not a top-rate taxpayer, so perhaps gift aid donations would not be relevant—I do not know whether she signs the form.
	The hon. Gentleman, like all hon. Members, will know that the number of galleries has expanded, so there is now considerable competition for attendance in the gallery sector. One is often better off if there are two or three galleries in an area because they are able to promote the area and many people will choose to visit several galleries in a day, rather than just one at a time.
	I urge people who work in the gallery industry to be open to possible changes to the system because that is likely to be in their interests. As I said to the hon. Member for Richmond Park (Susan Kramer), I do not accept the argument that if galleries give free admission for a year, it automatically means that they will mathematically lose the full cost of any visits that might have occurred during that year. It is free for me to go to the National Gallery and the National Portrait Gallery. I can now also go to the Victoria and Albert for free—of course it used to charge admission, but thanks to this Government it no longer does. The fact that it is free means that I visit it more regularly and thus use the bookshop more and drink more cups of tea and eat more chunks of cake there. Many galleries have found that such auxiliary services are not only a good way of making money, but often an important part of the educational and charitable purposes that they want to pursue.

John Bercow: We all want the hon. Gentleman to move on, but we also want clarity, if not too much of it.
	The hon. Gentleman objected to amendment No. 36 on the grounds that it did not remedy a mischief. His exegesis of the unamended clause is of interest, but it is not conclusive. Does he not accept that it would be helpful if the Minister made it clear that that the existing unamended clause is intended to embrace the terms of amendment No. 36? Failing that, we are justified in pursuing a belt-and-braces approach.

Ivan Lewis: When I was appointed Minister with responsibility for adult skills in the Department for Education and Skills, many people said that my challenge was to make that post sexy. Having listened to this afternoon's debate, I am not sure whether this challenge exceeds that one.
	I thank the hon. Member for Rayleigh (Mr. Francois) for his kind words about my new post. I enjoyed jousting with him on the Higher Education Act 2004 and I am sure that he will shadow me in a reasonably dignified way. [Laughter.] I nearly said that I look forward to the months and years ahead, but I will settle for the months ahead.
	This is my maiden Finance Bill speech, which, as I understand it, Mrs. Heal, means no interventions, a polite hearing from hon. Members and a discussion of the wonders of my constituency. Hon. Members' contributions covered an astonishing range of interests. I declare an interest as president of the Manchester City football club in the community scheme, by which admission to the trophy room has been entirely free for the past 29 years.
	I congratulate the hon. Member for Wimbledon (Stephen Hammond), because, as one will find if one studies Hansard closely, all the Tory amendments tabled for this debate come from his contribution on Second Reading. On that basis, he could well be yet another Conservative party leadership candidate. Indeed, when he referred to Nelson's ménage à trois, I wondered whether that was a potential solution to the difficulties facing the Tories as they choose their leader.
	The hon. Member for Richmond Park (Susan Kramer) made an important contribution. She said—this comment will be very familiar to all hon. Members in relation to the Liberal Democrats—that those on the ground always know best. That depends on which ground it is. The hon. Member for Buckingham (John Bercow) observed from a sedentary position that the Liberals back the Tories, but that would depend on which part of the country we were talking about, as well as which Tories.
	My hon. Friend the Member for Rhondda (Chris Bryant) kindly took it upon himself to answer questions on my behalf—at one stage, I thought that he was looking to swap positions with me. I am sure that I can have a word with the Chancellor of the Exchequer to see what we can do, but not just yet; perhaps I could be given a few months in the job.
	My hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson) asked how the Government will consider the proposal's impact on charities. To demonstrate how much confidence my advisers have in my ability to handle this debate, I have the answer here. It reads: "The Government has no wish to overburden charities. We are happy to monitor the effect of these changes over time." I hope that that reassures my hon. Friend. He is right to say that, whenever we introduce any new regulations or legislation in this House we must, as a matter of course, review its impact and ensure that it does not make the situation worse.
	The hon. Member for Ludlow (Mr. Dunne), who has so many interests that I wonder how he can cope with the burdens of doing this job—he said that he is now the director of a bookshop, as well, and is obviously a very busy man—made a reasonable point about the Mappa Mundi. I was delighted that my hon. Friend the Member for Rhondda—my shadow Minister, so to speak—was able to explain what that is, because I did not have a clue. On a serious note, the hon. Member for Ludlow raised an important issue. I will write to him about it, because I do not want to give him and his constituents a trite answer that may prove to be not entirely accurate.
	The hon. Member for Rayleigh made one or two comments that I did not completely agree with. He said that, during his conversations with various stakeholder groups involved in this debate, they described my hon. Friend the Financial Secretary as a reasonable man. I am not sure to whom he has been speaking. He said that they were anxious not to be caught up in party political fighting and read out an e-mail from the person concerned.
	On the whole, people have attempted to make a sensible contribution to the debate, bearing it in mind that these issues have an impact in the real world on charitable organisations that are doing an excellent job, as well on as those who wish to patronise them and to contribute significantly to charity. There is complete unity among Members on both sides of the Committee that the voluntary sector is an incredibly important part of the kind of society that we want to encourage. People making contributions to charity is in the finest traditions of this country, and gift aid—I give credit to the former Prime Minister who introduced it when he was Chancellor of the Exchequer—has been a particularly innovative and imaginative way of supporting and encouraging charitable giving. I was slightly bemused when the hon. Member for Rayleigh referred to difficulties with the playing field for publicly funded galleries and museums. There was no problem with a level playing field under the Tory Government because there was no question of free admission to museums and galleries. The Government should be incredibly proud of introducing free admission.

Ivan Lewis: My hon. Friend the Financial Secretary was described as reasonable for the way in which he dealt with the consultations. A significant period of re-evaluating and analysing the provision that we wanted to introduce has taken place to ensure that it did not have unintended consequences. I want to cite some expert and relevant stakeholders. According to my briefing, Sam Mullins is the chairman of the Association of Independent Museums, although the hon. Member for Rayleigh had a different person fulfilling that role. Perhaps we need to check. However, Sam Mullins is a world expert on such matters. He said:
	"The need to attract an additional donation of 10% will be a challenge. But one advantage is that it gives us the opportunity to communicate our educational and charitable objectives to visitors. We look forward to working with Government to promote public awareness and buy-in to the concept of Gift Aid."
	Equally important, Mark Taylor, who, according to my briefing, remains the director of the Museums Association, stated:
	"To its credit, the Treasury has listened, and is not only modifying its original plan, but also giving museums an extra year to prepare".
	That is a direct answer to the hon. Member for Rayleigh. A significant amount of evidence suggests that we have listened, consulted and taken seriously the concerns that people expressed.
	It is important to put clause 11 in context. The exemption of rights of admission as a benefit was first granted in the Finance Act 1989 in relation to charitable deeds of covenant and was applied to gift aid as part of the 2000 reforms. As many hon. Members have said, the exemption applied only to specific heritage and conservation charities.
	Some unintended consequences of the changes to gift aid donations have come to light. The clause tries to maintain the original objectives of generating new and additional giving and increase the range of charities that might benefit from the exemption while closing down the unintended consequences. The hon. Member for Rayleigh was fair enough to acknowledge that the consequences of the provision would be to increase the overall number of charities that benefit from the exemptions.

Greg Knight: Many of us are interested in this important point. Rather than merely writing to my hon. Friend the Member for Ludlow (Mr. Dunne), will the Minister place a copy of his letter in the Library so that we can all see what his answer is?

Mark Francois: Effectively, the Minister has said that he has accepted our amendment No. 36 in that the guidelines that the Treasury will produce will incorporate that, too. I thank him for that. Can he give the Committee some idea of when those guidelines will be available—at least the month in which they will appear—as those museums and charities that might be affected will want to get their hands on them as soon as possible?

Ivan Lewis: They will appear as soon as possible, when we can sit down with those affected and make sure that we get the list right. The point is that the list was never intended to be exhaustive.
	Amendment No. 35, which would reduce the 12-month period to three months by allowing gift aid to apply when the right of admission is granted for only three months, would diminish the distinction between paying an admission charge and making a gift that generates an ongoing relationship between the donor and the charity—the point that I was making earlier. That undermines an important principle of gift aid, which is about additional giving or additionality. Furthermore, a short period might encourage charities to manipulate the scheme when they think that it is unlikely that visitors will come back within such a three-month period: they could offer a three-month season ticket for a donation equivalent to a single admission and ensure that gift aid applies rather than asking for a donation that is 10 per cent. more than that admission. We believe that the principles of gift aid are very important, and that the 12-month period is about right for sustaining those principles. It is also important to mention that there is no requirement to offer annual membership for the same price as a single admission. That decision is for the charity, taking account of the relevant circumstances.
	Amendment No. 1 relates to the definition of "family". With regard to the contribution from the hon. Member for Wimbledon, one must ask whether a ménage à trois would qualify as part of a definition of the term. The key point about the legislation and guidance is that it is for the charity to determine what constitutes an accompanying family. Therefore, it will be for the charity to determine whether the definition relates to a relatively small number of people or a far more significant number of people. The scenario given on Second Reading by the hon. Member for Wimbledon, I think, raised the issue of what happens when one takes one's children and their friends to visit a museum. Clearly, those friends are not part of one's immediate family. Under the legislation and guidance, which we wish to keep as flexible as possible, it is absolutely clear that it is for the charity to define the term "family". In my view, there is a danger of an unintended consequence if we refer to 20 individuals, as charities might assume that that is the norm or median. As far as I am concerned, it makes sense to leave the provision as it is, whereby the individual charity defines flexibly, in this context, the term "family".

Judy Mallaber: The National Tramway Museum in my constituency, on whose behalf I have lobbied on this issue, is pleased with the way in which this matter has been dealt with. While I am happy with what my hon. Friend has just said, can he assure the Committee that we will not suddenly find regulations being put down that narrow the definition and that the provision will not suddenly be interpreted in a more restrictive way by those administering it?

Mark Francois: I think that I can genuinely say that this has been an informative debate and I thank all who have contributed. I noticed that we kept the Officials' Box rather busy, and I think we can all take that as a backhanded compliment.
	The Minister admitted in his introductory remarks that he had been a lifelong Manchester City supporter, so his courage is not in doubt, but he also said that he was making his maiden speech in a Finance Bill Committee. Actually, so was I, but I did not ask for quite the same mercy in the form of a lack of interventions. I think the Minister will forgive me if I put that on the record as well.
	This issue was dealt with for 18 months by the hon. Member for Wentworth (John Healey), who is now Financial Secretary to the Treasury. I was slightly disappointed that he did not respond to the debate. I take it that the baton was effectively handed to the Economic Secretary in a shuffle of responsibilities. Having heard the debate, I am sure that the Economic Secretary is delighted to have been given this bonne bouche by his more senior colleague.
	I listened carefully to the hon. Member for Richmond Park (Susan Kramer). I am grateful for her declaration of support for our amendment No. 35, which I am minded to press. Let me deal first, however, with amendment No. 1. My hon. Friend the Member for Wimbledon (Stephen Hammond) tabled an interesting amendment seeking to widen the qualifying definition in clause 11(5I), and made an interesting case for it. As this year is the 200th anniversary of the battle of Trafalgar, I was intrigued to hear of Lord Nelson's domestic arrangements, which my hon. Friend described at one point as a ménage à trois. Who is to say that debate on the Finance Bill must always be dry? Having heard what the Minister said, I suspect that my hon. Friend will not be minded to press his amendment at this stage. Nevertheless, he has succeeded in raising the issue in Committee and I congratulate him on that.
	I also congratulate my hon. Friend the Member for Ludlow (Mr. Dunne), who gave a number of practical examples of how the clause could directly affect his constituency. He also managed to get more interest on the record than I did in my opening remarks, and I congratulate him on that as well. My hon. Friend asked a specific question about how the Mappa Mundi would be affected. I was pleased to hear that the Minister had offered to write him directly. I hope that my hon. Friend will receive clarification that will be of value to his constituents.
	With amendment No. 36, we were partly trying to tease out the Government's thinking, but we also had a serious point to make. Let me say to the hon. Members for Wolverhampton, South-West (Rob Marris) and for Rhondda (Chris Bryant), both of whom spoke, that we drafted the amendment deliberately. We did not say that it would apply only to educative interactive facilities for children, because children do not have a monopoly on being educated. Adults can often be educated too, as the House of Commons proves regularly.
	Of course, as a rule of thumb, people under the age of 18 tend not to be taxpayers, so the issue is whether the institution itself can qualify. I am pleased that in his speech the Minister effectively accepted our amendment No. 36 by confirming that the guidelines that the Government will issue to clarify this matter will include that category of charity. I thank him for that, but I reiterate the plea on behalf of the whole sector that we have those guidelines as soon as possible. Quite properly, and for all the reasons that we have elucidated this afternoon, many museums and charities throughout the country will want to investigate whether they can qualify. The sooner, therefore, that the Treasury and Her Majesty's Revenue and Customs produce those guidelines in hard copy, so that everybody can read them and take a view, the better.
	I also paid particular attention to what the Minister said about amendment No. 35. I appreciate that his very reasonable predecessor has discussed this issue—which, as I said, dates back to December 2003—with the industry for some time. Originally, the Government were going to abolish qualifying institutions' ability to claim gift aid on admission charges. There was such a row that they retreated and came up with a modified position, on which they have also consulted. However, as we have attempted seriously to argue this afternoon, a number of institutions are still genuinely very concerned about how the clause will operate, particularly the provisions concerning the 10 per cent. additional charge and the one-year right of admission. We have tried to reduce that period to three months, so that the Government can protect revenue without charitable sectors—museums—being inappropriately affected to the point where their revenue schemes are under serious threat.
	We have made the case and I am sorry to hear that the Minister was not minded to accept it. I suspect that, as a result, this issue will rumble on. The Government have offered to review the situation in 2007, as the regulatory impact assessment points out, so we may yet need to consider how the provision works in practice. I make a final plea to the Minister that between now and consideration on Report in July, he goes back to those who are affected by this provision and considers the issue one last time. However, given that he has offered no concessions this afternoon, we have no option but to test the opinion of the Committee. I therefore wish to press amendment No. 35 to a vote.

Richard Spring: I beg to move amendment No. 2, in clause 18, page 17, line 9, at end insert—
	'(i) in relation to unit trust schemes and open-ended investment companies mainly invested in interests or rights in or over land, determine the rate of corporation tax for the year 2005 and subsequent financial years to be nil, or the rate at which income tax at the lower rate is charged for year of assessment which begins on 6th April in the financial year concerned.
	(j) include provision for unit trust schemes and open-ended investment companies to have different classes of units or shares, and to allow different distributions to be made in respect of such different classes subject always to any rules preventing discrimination between unit holders or shareholders made under section 64(2)(e).'.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 3, in clause 18, page 17, line 21, at end insert—
	'(f) make special provision for any interest or rights in or over land held by a unit trust scheme or open-ended investment company and may make special provision for withholding tax on distributions from an authorised investment fund, mainly invested in interests or rights over land, and may determine specific circumstances when such tax must be withheld.'.

Richard Spring: Thank you, Sir Nicholas.
	If the Government are going to reform the taxation of all collective investment vehicles, what is the point of these regulations that will cause the fund management industry much work to alter its systems?
	No tax law has yet been established for a tax regime for collective investment vehicles in property, and that is at the heart of the amendments. We understand that the Government have it in mind to establish such a regime by 2006, but the exact timing is still up in the air. There is uncertainty, so we need a clear timetable for action to establish real estate investment trusts.
	Clause 18 enables undertakings for elective investments in transferable securities to make distributions gross of withholding tax. That might, therefore, encourage overseas investments. This is of obvious concern to the industry and is at the heart of the amendment. It should be noted that despite several announcements by the Government saying that they will introduce tax legislation to give effect to real estate investment trusts, such legislation is not being introduced in this Bill. This is due to problems involving the current method of taxation of overseas landlords where rents payable to them are subject to a 22 per cent. withholding tax except when the landlord has the prior agreement of the Inland Revenue. The concern is that an REIT will effectively escape such tax when paying a distribution to the overseas landlord. However—this is the point—many other countries have REITs and tax regimes specifically for them.
	Amendment No. 3 highlights the problems and would enable legislation to be introduced following suitable consultation. I can only repeat that there is genuine concern that the problem is causing the property fund industry to locate elsewhere than in the United Kingdom. There are now £3 billion worth of listed property trusts in Guernsey that might otherwise be in the United Kingdom. The United States has these; Japan launched them in 2001; France in 2003; Germany is considering the introduction of such a vehicle; and it would be preferable if we could introduce a regime before then.
	Companies are effectively developing equivalent structures elsewhere. I understand that a major insurer established such a vehicle in Guernsey, complaining that it would have liked to have the option of establishing it as a UK vehicle. The longer it takes the UK to establish such a vehicle, the lower the tax take will be as more and more vehicles go offshore. A report that appeared in The Times on 10 June talked about REITs and the potential leakage later if the problem is not dealt with. It said:
	"The British Property Federation believe that they have shown the government that there will be no net tax leakage, so hence there is no cause for delay."
	Essentially, the amendment invites the Government to be more specific than they have been thus far. The amendment therefore proposes allowing REITs to be introduced. It highlights the problem and would enable legislation to be introduced following consultation.
	Amendment No. 2 would enable one of the suggested solutions to be that the tax is charged at nil in the REIT with greater tax then due to arise on the investor in the REIT if it is so chargeable to tax. Most investment vehicles have to distribute the majority of their income each year and those distributions are taxable if the recipient is a UK resident. However, under tax treaties, overseas investors may avoid the tax charge altogether. Of course, I understand the problems involved in the current method of taxation of overseas landlords where rents payable to them are subject to a 22 per cent. withholding tax, except when there has been prior agreement with the Inland Revenue. However, there remains the concern that an REIT will effectively escape such a tax when paying a distribution to the overseas landlord. The genuine concern is that this issue, which is yet to be resolved, is causing the property fund industry to locate elsewhere than in the United Kingdom.
	The head of indirect property investment and strategy at Merrill Lynch Investment Managers warned that if the Government did not get the tax model right, the flow of domestic UK property investment offshore would also accelerate. That point has also been made by the British Property Federation, which said that Britain could not afford to wait on the introduction of REITs. Since France has adopted the US model, it has seen the market capitalisation of 10 established quoted property companies double within 18 months. If we do not act quickly—we need reassurance from the Government on this—we will not be the international REIT centre that we should be. For 20 years, the UK commercial property market has lobbied for the introduction of REITs. The industry does not share the view that there would be tax leakage. Most overseas investors are not paying tax to the UK Government anyway and many invest through offshore structures. Money has been, and regrettably is, flowing to offshore commercial property trusts.
	The US is undoubtedly the home of the REIT. Last year, it achieved an extraordinary 30.4 per cent. total return for investors and 22.5 per cent. over five years. The attraction has been the high dividend yield, which in the US is more than 5 per cent. compared with less than 2 per cent. for equities. I say that because in an era of low yields from investments pretty all way round the world, it is difficult for those who want investment income to achieve a return. Through the amendment, I ask the Minister to consider what has happened in the US since the establishment of its Act in 1960. Companies that operate as REITs pay no tax on corporate income and, in order to get that tax break, REITs must pay out at least 90 per cent. of every dollar in income to shareholders in the form of a dividend and companies can pass on the tax savings from the dividend deduction to shareholders, making REITs an attractive investment.
	In the Government's discussions on this and other tax regimes, we will need to look at this issue very carefully. As I have said, REITs operate in many other countries such as Australia, Hong Kong, Singapore and France. In France, for example, foreign investors, who are always a difficult issue to deal with for any tax authority, do not pay tax on REIT incomes if from abroad. If a 22 per cent. tax rate were introduced, the foreign investor issue would be neutralised except for those who have a particular arrangement with the Revenue, but UK pension funds, which pay no tax, would suffer. We must examine the issue particularly in the light of the competition that we face elsewhere. That is why we have tabled the amendments.
	I return to the central point of my argument. We have exceptional expertise in this country in all spheres of investment and we do not want that expertise to be deployed against our economic interests. We really need to move on, and I hope that the Minister will be able to provide some comfort on the issues that I have raised.

Christopher Huhne: Your apology was most gracious, Sir Nicholas, although there was no need for it, given the circumstances.
	I was slightly surprised by the sideways glances made by the hon. Member for West Suffolk (Mr. Spring) at the Liberal Democrat Benches because they implied that he had these matters under enormous control, yet somehow we did not. I merely draw his attention to the amendment paper. Amendment No. 2, which stands in the hon. Gentleman's name, refers to a provision that is not part of the Bill: a section 64(2)(e). I can only assume that the reference was lifted straight off the hon. Gentleman's word processor from when he was examining the Finance Bill presented before the election and that he has not bothered to check that the provision still forms part of this Bill. I do not think that we Liberal Democrats need to take any lectures from the Conservative Front Bench about attention to detail. We know that the Government's majority in the House is substantial, so I hope that the Minister will be sufficiently open-minded to allow the power of argument to persuade him to revise several provisions. I shall thus spell out several worries that we have about clause 18.
	Clause 18 sets out the specific powers that are to be delegated to the Treasury to shape the taxation of open-ended investment companies—so-called OEICs—and authorised unit trusts, or AUTs. The important powers will be able to have a substantial impact on the taxation of those entities. I have three key points to make to the Minister.
	First, there is no obligation on the Treasury to be open or transparent when taking such substantial powers. Given the concerns of the industry, there should at least be a commitment to proceed by consultative draft regulations. Even better, the provisions should be subject to a four-year sunset clause to bring them into line with similar provisions in European legislation. The clause is entirely silent about the manner in which the Treasury should proceed, but that is frankly extraordinary given the song and dance that the Treasury rightly made about putting obligations on the European Commission and the European Securities Committee, on which it is represented, when they take decisions about financial services in directives by delegated powers. At the very least, the Treasury should proceed by draft regulations that allow the industry to comment.
	I hope that the Minister will assure the Committee that the Treasury will always allow adequate time for consultation. The Treasury was sensible when it insisted that there should be a three-month period for consultation before directives made under delegated powers were adopted at the European level. Laying something before the House for 21 days does not represent a proper consultation by the standards that it has applied to the scrutiny of European legislation.
	Secondly, the clause means that there is still the possibility of reintroducing double taxation of a fund designed by the Financial Services Authority as a fund under the qualified investor scheme. The loss of large tax-paying investors' tax advantages could be triggered if investors with more than 10 per cent. of stock liquidated their funds. There are obvious exceptions in the clause for nominees, pension funds and insurers, but there is a serious potential penalty on tax-paying investors in the vehicle who might find themselves facing a tax liability through no fault of their own.
	For example, any investor—an institutional investor, an individual or a corporate—could liquidate holdings in a QIS fund, leaving other tax-paying investors, such as corporates or individuals, with more than 10 per cent. of the stock because the funds are open-ended, not closed-ended. The money would be drawn from the open-ended fund leaving other investors necessarily with a higher proportion of what remained. That could put off tax-paying investors because they would not be prepared to take the risk of investing in such a vehicle. The economies of scale in pooled funds would be limited and the UK would be made a less attractive base for such funds. I know of no other EU state that has anything like the measure that we are considering, so it represents an open invitation to incorporate such funds not in London or Edinburgh, but Dublin or Luxembourg, although I am sure that that is not the intention of the Treasury or the Minister.
	I understand that there might have been tax-avoidance structures that may have used funds in a way that caused concern in the Treasury, but surely that is not the case for QIS funds because, of course, they have not yet begun. However, the Bill contains no provisions to deal with other uses of funds, such as retail funds, that could have caused the original worry in the Treasury about the possibility of tax avoidance. Furthermore, there is doubt about whether the provisions will catch people. The fund must be required to show that it is managed at arm's length from any investor to ensure that tax-avoidance provisions are effective. The investment function should thus not be influenced by any communication with the investor. That would be more appropriately enforced by a rule from the FSA than by attempting to do so in the way outlined in the clause.
	On my third point, I agree with the hon. Member for West Suffolk, so I shall try not to repeat too many of his arguments. The broad principle at stake is tax neutrality. The provisions in clause 18 apply only to open-ended investment companies and authorised unit trusts. They do not apply to the main competitors to those vehicles, namely closed-end funds, or investment trusts as they are more commonly known. One result of the measure would be to widen further the tax advantages enjoyed by OEICs and AUTs compared with investment trust companies, especially when investing in bonds, which would thus distort the market. That would be bad in principle because it would poison fair consumer choice, but it would also be bad in practice because ITCs might be an objectively better vehicle for certain kinds of investments, including bonds, than unit trusts.
	For example, I remember in the wake of the Asian financial crisis when there was substantial and persistent selling pressure out of unit trusts that had specialised in the affected countries, which meant that the trusts sold off the most liquid, and often the best, investments to repay their investors. That meant that the less-good investments were left for those who did not get to the door first. There are now specific provisions in the wake of 9/11 to stop a catastrophic run or loss of confidence, but far short of that eventuality, one can experience real problems, especially with investments in emerging markets. By contrast, investment trusts merely see a widening in their price discount to net asset value, which makes them a much safer vehicle when there is high volatility in the asset class, for example in emerging market bonds.
	I hope that the Treasury will consider bringing forward a more radical recasting of the tax provisions to put investment trusts, OEICs and AUTs on an equal footing. In general there is a need for the UK to simplify the tax code for all those investment vehicles to ensure that there is a level playing field. I hope that the Minister will assure me that he will consider the matter again.

Christopher Huhne: Both amendments are sensible and we support them. The hon. Gentleman perhaps knows from my remarks on Second Reading that I think REITs have an important role.
	I ask the Minister to address those three points. The first is the proper amount of consultation, which is appropriate given what the Treasury has said in the context of European powers of a parallel nature. The second is ensuring that there is a real QIS fund that is attractive to investors because it does not put taxpaying investors at an unnecessary risk. The third is the wider issue of tax neutrality.

Brooks Newmark: I want to touch on the impact that the current tax regime has on real estate investment trusts, which are at the heart of what we are discussing. Notwithstanding the Government's recent announcements on introducing tax legislation that gives effect to REITs, I remain concerned that it has not happened. The problem centres around the tax of overseas landlords. Although I understand that prior agreements can and have been established with the Inland Revenue, it is the uncertainty that causes me alarm because it may drive our nascent property fund industry to other countries that have more attractive REITs and tax regimes.
	There are three or four specific benefits that I want the Minister to consider. As my hon. Friend the Member for West Suffolk (Mr. Spring) said, if we do not address the problem, we will drive the REIT industry to other regimes. The industry has been extremely successful in the United States for well over a decade, but REIT managers who want to come to this country are being driven to Guernsey, Germany and other European countries with attractive tax regimes. In establishing a bone fide REIT industry, we can offer the great benefit of our successful private equity industry. As we have seen in the United States, many private equity firms have successfully established property fund managers who in turn have established REITs.
	REITs can benefit the United Kingdom economy and the Chancellor. Unless we attract people to this country and develop an attractive REIT regime, we will not increase employment in the City, which is the heart of the financial centre of Europe. It is important that we capture our talent and bring in more investors to the real estate industry as a whole and to REITs specifically. If we employ more people in that industry and, again, in REITs specifically, that will increase the tax take in terms of income tax, because more people will be employed, and in terms of the companies that are established. I ask the Minister to think about what we need to do and to consider the amendments so that we establish a successful REITs industry sooner rather than later.

Rob Marris: What does the hon. Lady think would happen to land values in the United Kingdom if we allow REITs to go ahead?

Theresa Villiers: I am not aware of the statistics, but other factors are likely to be in play. I cannot see any evidence for the existence of a REIT framework facilitating such an increase in land values. Many other factors could have caused that increase. We heard about the great success of REITs in the United States, where they have been used for many years. It does not seem to have a huge problem with spiralling land values.
	It is important to provide ease of access to different types of investment. It is a basic investment in economic terms to encourage people to diversify their investments as much as possible. REITs have the benefit of allowing people an easier alternative to equities and are an easier way to buy into a portfolio of property because they do not have to invest everything in a single property. They have a significant value in terms of diversification of people's investments, with the consequent reduction in risk. That is one of their great values and it is why, once a proper tax and regulatory framework is in operation, I would expect REITs to go from strength to strength and to become much more common.
	I said that I support some of the Government's statements on REITs, but we need changes to ensure that the tax framework becomes more certain. I hope that they will consider supporting the amendments as a route towards clarifying the tax position on REITs. Uncertainty is one of the greatest vices in terms of investment and the competitiveness of a financial centre. If one discusses tax or regulatory measures with experts down the road in the City of London, they often emphasise that clarity and certainty about the rules is, in a sense, more important than the content of the rules themselves. Uncertain rules or frameworks are one of the best ways to drive away investment, and hence erode our competitive position.
	As my hon. Friend the Member for West Suffolk said, people in this country have tremendous expertise in investment and financial services. Indeed, that expertise can be narrowed down to one place—the City. My constituency is on the edge of London, and I have many constituents who work in the City. It is a great economic asset to our country and the continent, and we must ensure that it remains competitive in the important new area of real estate investment trusts. If we do not grapple with the issues, we risk losing out on that new market or growing sector, as other hon. Members have said. It is universally acknowledged that once one loses a market it is almost impossible to regain it.

Brooks Newmark: I have been thinking about the question asked by the hon. Member for Wolverhampton, South-West (Rob Marris). I know a little about REITs, although I have never invested in them myself. The hon. Gentleman was concerned about the causal effect of REITs on property prices, but there is not any evidence whatsoever of property price inflation caused specifically by REITs. There is enormous price inflation in France and other European countries that do not have REITs, so there is not any evidence of cause and effect. It is important to make that point clear.

Ivan Lewis: I entirely reject the hon. Gentleman's contention. We believe that the United Kingdom remains a location of choice for such activities, for a variety of reasons. We do not believe that his concern about his perception of unintended consequences is legitimate, but I am sure that we will have the opportunity to discuss those matters when we look at the regulations.
	I shall address REITs-related issues. Amendments Nos. 2 and 3 cover two different aspects: the taxation of authorised investment funds that invest mainly in property and the treatment for authorised funds that have different classes of units or shares. On the second issue, amendment No. 2 seeks to insert a provision to allow authorised investment funds to have different classes of shares or units and to make different distributions in respect of them. We do not believe that the amendment is necessary. OEICs can already issue different classes of shares, and as we indicated in the Budget, regulations will be made to enable authorised unit trusts to do exactly the same. The powers taken in clause 17 enable that to happen, and clause 18 also includes a subsection to cover the point.
	On the taxation of funds that invest mainly in property, amendment No. 2 seeks to enable regulations to be made that charge an authorised investment fund's property income to tax at either a nil rate of corporation tax or a rate equivalent to the lower rate of income tax. Amendment No. 3 seeks to allow special arrangements for withholding tax to be applied to distributions to investors by authorised investment funds that invest mainly in property. We believe that neither amendment is needed to enable regulations to achieve the outcome that the hon. Member for West Suffolk intends. The powers taken in clause 17(3) allow for the rewrite in regulations of the tax regime governing authorised funds.
	Clause 18 was inserted in the Bill to explain how we intend to use those powers. It is simply an illustrative clause, and the industry asked us to include such a clause to reassure the House, in the absence of draft regulations, about how we intend to go about rewriting the current regime. In that respect, the purpose of the clause is to help to explain the proposed changes, not to define them.
	I turn to the specifics of the proposed amendments to the treatment of property income. More broadly, partly in response to changes to the regulatory regime for authorised investment funds made by the FSA and the possible introduction of a UK real estate investment trust, the Government are considering whether changes to the taxation of property within authorised investment funds might be appropriate. As hon. Members are aware, that consideration is ongoing, although I appreciate their feeling that the matter is urgent and requires speedy action. It would therefore be premature to provide specific examples of how the taxation of property might be taken forward in this Bill or indeed anywhere until the position for UK REITs has been finalised. At this stage, it is important to talk hon. Members through the thought process and the different stages of the REIT debate.
	One feature of the significant consultation exercise is the consensus that a key challenge has emerged in relation to international treaty obligations. I do not think that there is any doubt among hon. Members in all parts of the House that that is a genuine difficulty. It poses a significant challenge with regard to meeting the Government's specific objective of having no overall Exchequer cost. In the most recent Budget, the Government therefore published a further discussion paper that set out our latest thinking on the UK REITs and highlighted three challenging and technical tax issues that we felt needed further discussion with the relevant parts of the industry. We made it clear at that stage that the outcome of the consultation would inform our decision on how property should be taxed in authorised unit trusts and open-ended investment companies. Those two issues will be taken forward in parallel.
	We have had a number of meetings with industry working groups, particularly of tax specialists, to consider the outstanding issues that have arisen in those discussions about REITs. We have also received a number of written responses, only within the past few days. I reaffirm that, as the Budget discussion paper said, we intend to legislate in 2006, subject to our capacity to find a workable solution to the issues that have been raised. I reaffirm that that is the Government's intention.

Mark Francois: On a point of order, Mrs. Heal, in our earlier debate on clause 11, I cited Mr. Bill Ferris as the chairman of the Association of Independent Museums. In his response, the Minister sought to correct me and said that Mr. Sam Mullins is the chairman of AIM. I have double checked the situation, and AIM recently held its annual general meeting, where those responsibilities were changed and Mr. Ferris became chairman. I have received this e-mail from Mr. Mullins:
	"I am now Vice Chairman of AIM and remain Director of London's Transport Museum. We had our AGM in May and our website needs updating".
	I hope that the Minister will accept that clarification.

Ivan Lewis: Further to that point of order, Mrs. Heal, I thank the hon. Gentleman for that clarification. In this case, however, the words of the vice chairman are as important as those of the chairman.

Philip Hammond: Schedule 8 is complicated—it deals with the financing of private equity finance companies and the loan relationships that typically underpin them—and we want to explore a number of issues with the Government over the next couple of hours.
	Schedule 8 amends the scope and the effect of application of the transfer pricing rules, which are well-established in our tax law to deal with situations in which parties who are not at arm's length might manipulate pricing arrangements. That might involve the pricing of interest rates in relation to loans, the terms of such loans or, at an altogether different level, the price at which goods are transferred between a parent company and a subsidiary or a subsidiary and a parent company, which could, if left unchecked, give rise to considerable distortions in tax charges. Tax experts have told me that transfer pricing is, perhaps unsurprisingly, the most common area of dispute between taxpayers and the Revenue.
	Schedule 8 attempts to address an area of transfer pricing that has not hitherto been caught by the snappily titled schedule 28AA to the Income and Corporation Taxes Act 1988. As I said on Second Reading—I am sure that the Financial Secretary knows this—there is a considerable degree of resentment in the private equity venture capital industry at how a change to the arrangements affecting that industry is being badged as anti-avoidance legislation, when the industry has clearly asserted that its practices have hitherto been in pursuance of a model well known to and agreed with the Revenue and the Treasury.
	The industry accepts that the Government and the Treasury can determine that it must change its arrangements, which were acceptable in the past, but it would send a positive signal to the industry if the Minister were to acknowledge that schedule 8 is about changing the rules rather than addressing an avoidance mechanism that has been used in the past, which is part of the industry's problem with how those issues are being presented. The Minister should acknowledge that the model used by most of the private equity industry is long-established and has been subject to regular discussions between the industry, the Treasury and the Revenue and that the legislation relating to schedule 8 was amended at the request of the industry, and with the agreement of the Revenue, as recently as the Finance Act 2004.
	The Government say that they want to address narrow concerns. The industry's fear is that the Bill is potentially wide-ranging and that it could have significant negative impacts on both the UK private equity and venture capital industry and UK businesses that are financed by private equity or venture capital.
	Paragraph 1 of schedule 8 amends the definition in paragraph 4 of schedule 28AA, which defines persons who are deemed to be participating in the management, capital or control of a company. Paragraphs 1(2) and 1(3) of schedule 8 deal with a situation which is not covered by schedule 28AA and which the Government clearly feel needs to be addressed. Schedule 28AA deals with transactions between a parent and a subsidiary and with the situation in which a transaction is between two parties and a third party controls both those two parties, but it does not deal with transactions that fall within what might be deemed the normal private equity financing model, whereby a number of unconnected parties act through a common investment vehicle, none of whom individually has control, as defined in tax legislation, but all of whom have an aligned interest in their relationship with the operating company, and all of whom collectively, were they to act collectively, have control.
	Typically, such a structure will involve a limited partnership that is probably not in the United Kingdom. There will be several private equity investors who are partners in that limited partnership, and the partnership will invest in an acquisition vehicle, typically a company, which will then acquire the business ultimately to be financed. That might be a young, dynamic, growing business which seeks an injection of private equity, perhaps to get it to the next stage through a rapid phase of growth to the point where it can go to the public markets. It might be a larger business that has hit troubled times and is crying out for an injection of private capital to allow it to be restructured and its management to be refocused—that needs, as it were, to go into the intensive care ward that private equity funds can often provide. Or it might be a non-core business of a large conglomerate that has been ignored or on to which the focus of its parent has not been properly directed, and where the management are willing and able to take the business forward to ensure that it grows and venture capitalists or private equity investors can see the opportunity to come in behind the management team and allow the business to grow. It is very important, from the point of view of UK plc, to help the most dynamic businesses in our economy to grow and to help established businesses that may not be performing as they should to get themselves turned around. It would be a great shame were the Government inadvertently to introduce legislation that damaged the way in which the private equity venture capital model operates.
	Paragraph 1(3) introduces new paragraph 4A into schedule 28AA to try to deal with the problem identified by the Government by creating a wider definition of control. This is fairly complex and tortuous stuff, but I shall try to get it right. A person, P, will be deemed to have control of a company, A, where P and others have "acted together" in relation to financing arrangements for A. That is very legalistic, but I take it to mean that where P has been involved in setting up the private equity funding deal that backs company A, P will be taken to have control of A if it is not a requirement that P has control over A, but if P and the other parties with whom he acted together in setting up the financing arrangements for A, taken together, have control of A—in other words, the rights and powers of each of those investors, when pooled together, amount to control—then P will be taken to have control of A, and that will be sufficient to bring the private equity limited partnership transactions within the scope of the existing transfer pricing rules in schedule 28AA. That gives rise to several issues that we will explore later on.
	We recognise the problem that the Government have identified. Clearly, arms-length pricing of transactions is the proper way to proceed and the proper basis on which to levy tax, and if there is evidence of a serious abuse of arms-length pricing, it is right that anyone continuing such abuse should be brought within the scope of the transfer pricing regime. As I said earlier, where there is a group of parties who are technically unconnected in terms of the existing legislation but who have an absolute identity of interest because they all own the target company, A, it is equally likely that they will have the ability to manipulate the pricing arrangements in their transactions with A, as would be the case were it a single controlling entity.
	We entirely accept that, but I must reiterate the point that I made on Second Reading about babies and bathwater. Of course we understand the Government's motivation, but the numbers that they have put forward suggest that relatively modest amounts of tax are at stake. The concern in the industry and more widely is that this measure is very widely targeted and could, if we are not careful, have a very detrimental effect on the industry as a whole, perhaps, ironically, even reducing the overall tax take over a period of time. For us, the point is to try to narrow the focus of any change in the rules to address the mischief that has been correctly identified while ensuring that it does not spill over to have unintended consequences elsewhere.
	This group of amendments is intended to avoid a situation whereby the Government, in dealing with what they see as an abuse, inadvertently open up another loophole. Given that a group of investors has been identified as being outside the existing transfer pricing rules, and given that the Government want to bring those investors inside the existing transfer pricing rules, it might be thought that the simple way would be to define them and to say that they too are persons subject to those rules. However, that is not what the paragraph does. It limits the extent to which those parties are brought within the transfer pricing rules to "provision"—that is, something that is done—in relation, to any extent, to financing arrangements for A, which is the company that the investors, one of whom is P, collectively own. It is unusual for me to stand here saying that a provision might be too narrowly drafted, but in this case we are worried that the Bill, by narrowly drafting the extension of the transfer pricing rules to apply only to those matters that relate to any extent to financing arrangements, may not catch everything that it needs to catch. If it identifies people—in this case, an investor group—who should be subject to the transfer pricing rules through having acted together to arrange finance for the company, which is typically the company that does the borrowing, surely all transactions between those persons and the person of whom they are each deemed to have control, not only those that relate to the financing arrangements, should be subject to the transfer pricing rules.
	For example, what about management fees that are charged between the parties to such an arrangement? What about consultancy fees or intellectual property licensing fees? All those matters should be of concern if the Government's fundamental anxiety is justified and there is evidence of non-arm's-length pricing between groups of parallel investors who invest in a target company and that company. An obvious avoidance route is open to those parties if the arrangements that the Government are extending are limited to matters that relate only to the financing arrangements.
	The identity of interest between the parties creates the motive but, as drafted, the transfer pricing rules cannot be applied to transactions other than those that relate to the financing arrangements because schedule 28AA is amended to include people who have such indirect control only in respect of financing arrangements.
	Let me briefly go through the amendments. Amendment No. 10 would simply change the heading in line 23, replacing
	"Persons acting together in relation to financing arrangements"
	with "Persons acting together".
	Amendment No. 8 would delete proposed new paragraph 4A(1)(a), which requires the provision to relate to financing arrangements for A.
	Amendments Nos. 38 and 9 would reword proposed new paragraph 4A(1)(c) so that it read: "P and other persons acted together in relation to financing arrangements for A".
	Sub-paragraph (2) deals with a position whereby a party has control of both parties to the transaction. Amendment No. 7 would delete (a). Amendment No. 12 would reword (b) and amendments Nos. 13 and 14 would reword (c).
	The amendments seek the overall effect of ensuring that all transactions between parties deemed to have control under proposed new paragraph 4A of schedule 28AA would be subject to the transfer pricing rules. Presumably that is the Government's desired outcome. We see no reason for including the potential controlling party in respect of only one sort of transaction. I hope that the Financial Secretary understands what we are trying to achieve. Perhaps one of the weaknesses of the system is that we have to table amendments, to which a Minister has to prepare responses, guessing the arguments behind the amendments.
	If the Financial Secretary will not accept the amendments or at least their thrust, he needs to explain how he can prevent the tax planners in the big accountancy and law firms from simply moving to exploit other transactions between the same parties that are now defined as being subject to the transfer pricing rules, thus perpetuating what he clearly perceives to be an abuse.
	Amendment No. 17 deals with a small and technical point in proposed new paragraph 4A. Perhaps the Financial Secretary can throw some light on it. Sub-paragraph (2) deals with a party who, with the rest of the investor group, controls a borrower and a lender—in other words, a single party that is deemed to have control of both the borrower and the lender in a loan relationship. The amendment simply questions whether the word "person", which appears in line 9 on page 125, should be changed to "persons". Sub-paragraph (2)(d) reads:
	"Q would be taken to have control of both B and the other affected person"—
	in the singular—
	"if, at any relevant time, there were attributed to Q the rights and powers of each of the other persons mentioned in paragraph (c) above."
	That should be straightforward: B is the borrower and the other affected person—in the singular—is clearly the lender. They are the two parties to the transaction as paragraph 1(1)(a) of schedule 28AA defines them. It refers to a provision
	"made or imposed between any two persons"
	and defines them as the "affected persons".
	However, now that we are introducing the concept of limited partnerships as one of the "affected persons" who can be subject to the transfer pricing rules, we are therefore including in those rules an entity that is tax transparent. Including the tax-transparent entity—the private equity funding partnership—in the rules is the purpose of the schedule. I understand that, when a tax-transparent partnership is introduced as the lender, tax law will look through that partnership and consider a loan relationship to be in place between each partner and the borrower. In those circumstances, the language of proposed new paragraph 4A(2)(d) and, indeed, of paragraph 1(1)(a) of schedule 28AA does not quite do the business any more.
	The possibility of more than two affected persons—more than one lender for the one borrower who is caught by the transaction—must now be contemplated. If I am wrong, I am sure that the Financial Secretary will explain the reason. We are simply asking whether there could now be "B and other affected persons" in the plural. I am sure that, if that is the case, the Financial Secretary will consider whether some redrafting should take place of proposed new paragraph 4A(2)(d) and paragraph 1(1)(a) of schedule 28AA, where it specifically refers to affected persons being "any two persons" between whom provision is "made or imposed".
	Amendment No 19 again simply probes the Government on their willingness to lay down some rules about what constitutes arm's-length provision in different circumstances. If the Government accepted the amendment or something like it—I say that in all humility because amendment No. 19 is not perfectly drafted and does not do what we want it to do but we hope that it is clear enough for the Government to take its point—it would create a safe harbour for investors who complied with the criteria or parameters that the Treasury set down. That would be helpful and I understand that it is common practice in other jurisdictions.
	In amendment No. 19, we propose to introduce new wording at the end of section 28AA—that is the end of the effective provision in the section—to provide that the Treasury may make regulations about, specifically, the minimum income cover in a financing arrangement and the maximum debt equity ratio in respect of a financing arrangement that would be acceptable to the Treasury so that an investor might know that, provided there was compliance with those ratios or criteria, as set down by the Treasury, it would not be deemed to be within the scope of paragraph 4A and thus subject to the transfer pricing rules. The idea is simply that provided that arrangements fall within defined parameters they will not be caught by the provision.
	I hope that the Financial Secretary will concede that there will be some merit in terms of providing certainty in having these defined safe-harbour provisions. We accept that they would have to be defined to allow for different ratios in different circumstances and in different types of sector. For example, a service industry would clearly need to have different ratios and parameters laid down when compared with a capital intensive business such as oil and gas production.
	In the absence of these safe-harbour type provisions, the danger is that nearly all private equity deals will face an additional and unwarranted degree of uncertainty, as it is necessary to consider for the given arrangements in any deal whether the Treasury or the Revenue commissioners are likely to treat them as being at arm's length or not. Who knows? I think that the Government are trying to send soothing signals to the industry that only the most blatant abuses will be targeted, using these provisions. However, I think that the Minister would acknowledge that the Treasury's scope, or that of the Revenue, for focusing its view and challenging arrangements at the margin is considerable within the schedule as drafted. That will inevitably introduce uncertainty.
	The Chancellor is fond of reminding us how important stability is to the development and growth of the economy. Anything that tends to undermine certainty and predictability—anything that looks like creating uncertainty, and certainly anything that looks like arbitrary or capricious unravelling of arrangements that have been put in place and agreed to over a long time—is likely, or even certain, to make the UK a less attractive climate for overseas private equity or venture capital investors, and is likely to make it thus commensurately more difficult for UK-based businesses seeking private equity or venture capital funding to obtain that funding.
	We are talking about a very competitive area. It is a field in which, currently, the United Kingdom is a very major player. We are second only to the United States in the volume of private equity funded business. The British Venture Capital Association estimates that £127 billion worth of sales generated by businesses in the UK economy are backed by venture capital private equity and that some £23 billion worth of taxes that are payable to the Exchequer flow from these private equity and venture capital backed sectors of our economy.
	I am sure that the Financial Secretary would be the first to confirm that the Government do not want to do anything that would destabilise what has proved to be an extremely successful model that has been financing businesses that on average grow faster than the economy as a whole. On average it has created jobs more quickly than the economy as a whole. I hope that the Financial Secretary will be able to respond to the intention behind amendment No. 19, even if I have acknowledged to him that I recognise that, as drafted, it does not quite do what we would like it to do.
	Amendments Nos. 15 and 39 were attempts to tighten the language of sub-paragraph (7). I do not think that they add a great deal of substance and I do not propose to detain the Committee by speaking to those amendments.

John Healey: I pay tribute to the reflective and serious way in which the hon. Member for Runnymede and Weybridge (Mr. Hammond) moved the amendments and introduced a fairly wide range of general remarks on the nature and principle of the provisions. The clause gives effect to schedule 8. The purpose of the legislation is to make the tax treatment of company finances fair between all companies regardless of their ownership and of their financing structures. The clause gives effect to changes in transfer pricing and loan relationship rules that will provide a more even playing field for business. The legislation should help to ensure that changes in companies' ownership and financing happen for the right reasons—in other words, to deliver real economic benefits rather than just to chase tax advantage. I think that the hon. Gentleman was clear about that.
	When applied to a company's financing arrangements, transfer pricing rules limit deductions for interest payments to the amount that the company would be entitled to had it borrowed at arm's length to an independent vendor. The hon. Gentleman said that these transfer pricing rules are well established and, as he said, properly so. However, existing transfer pricing rules apply only if one of the parties to the arrangement has control of the other or if both are under common control.
	We became aware that companies and their investors were being advised by some professional advisers to put in place financing and ownership structures specifically designed to get around the rules so as to achieve an unfair tax advantage. The schedule anticipates such problems on a wider scale and seeks to close the loophole. It will ensure that the transfer pricing rules also apply if two or more parties who together control a business act together in relation to its financing arrangements.
	In addition, transfer pricing rules are extended to cover financing arrangements put in place after six months before a control relationship between the parties involved. The schedule also tightens loan relationships that regulate deductions for late paid interest and discounts owed to connected parties.
	I was interested that what seemed to drive the amendments was not entirely what was obvious from reading them. What seemed to drive them was the hon. Gentleman's concern that the Bill and the schedule might be too narrowly drawn, or too narrowly focused. The group of amendments generally appear to seek to change the scope of the transactions that are affected by the rules as they apply where persons act together in relation to the financing arrangements of a business.
	The hon. Gentleman said that the rules seemed tightly to relate to financial arrangements. The measures relate to transactions related to financing and not only to the financing itself. Where there is abuse—for instance, with related activity perhaps such as consultancy or management fees—HMRC will act to challenge that as well.

Philip Hammond: I beg to move amendment No. 18, in page 125, line 45, leave out from beginning to end of line 23 on page 126.
	Schedule 28 AA of the Income and Corporation Taxes Act 1988 provides that where an interest payment is disallowed or reduced under the transfer pricing rules, thus increasing the tax payable by one party to the transaction, a corresponding adjustment is available to the other party. That is a sensible measure, which avoids double taxation occurring where part of a transaction has been disallowed under the transfer pricing rules.
	Sub-paragraph (5) of paragraph 1 inserts a new sub-paragraph (4A) in paragraph 6—not to be confused with the paragraph 4A that we were debating earlier; for some reason everything in schedule 8 relates to a paragraph 4A. The new sub-paragraph (4A) excludes the entitlement to a corresponding adjustment where two conditions are met: first, that the provision subject to the transfer pricing rules is subject to them only as a result of the paragraph 4A introduced by sub-paragraph (3) in paragraph 1; and, secondly, that a guarantee is provided in relation to the security issued by the debtor by a person who has a participatory relationship with the debtor. That participatory relationship is defined so as to include the subsidiaries of the debtor.
	If A is one of the private equity investor group defined by sub-paragraph (4A) of schedule 28AA as participating in the management, control or capital of B—the acquisition vehicle—and B is both the acquisition vehicle and the debt issuer, it would be perfectly normal in those circumstances for B's obligations as a debt issuer to be guaranteed by its operating subsidiary. To put that in practical terms, the companies generating the cash flow will, typically, guarantee the debt obligations being taken on by the holding company in the form of a raft of cross-guarantees between companies in the group.
	The transaction is subject to transfer pricing rules because of the sub-paragraph (4A) to be inserted in schedule 28AA. So, B's interest charge may be reduced or disallowed for corporation tax purposes but, because of sub-paragraph (5), the lender is not entitled to reciprocal treatment, thus reducing its interest receivable for corporation tax purposes.
	Why is that? The question does not arise because we are being a little slow on the uptake. No one, including the body of expert opinion in the City, which considers these matters very closely, is sure of the answer. What is the relevance of the guarantee? Why does the existence of the guarantee relationship between a subsidiary and its holding company invalidate the right to claim a corresponding adjustment in the corporation tax return of the lender where a corporation tax deduction has been disallowed or reduced in the hands of the borrower? What is the abuse that the Government imagine they are addressing by the inclusion of sub-paragraph (5)?
	In many cases in which straightforward bank debt is involved, there will be no disallowable interest because the transaction will clearly be at arm's length. However, to rehearse the argument that we had on the last group of amendments, what about banks with an equity participation in the target company? What about banks that have a private equity division or those that have provided an integrated financing package for the company, including equity and debt as an alternative to a conventional private equity investment? On the face of it, those banks will not be able to secure a corresponding adjustment.
	For example, when the lending that takes place is not senior debt lending but mezzanine lending—high coupon lending that takes a subordinate security to the senior debt—the correct pricing of that arrangement may not be so clear-cut for it to qualify as an arm's length transaction. I am not talking about a situation in which an equity kicker is attached to the mezzanine funding, but one in which there is relatively high coupon debt with a subordinate security interest.
	It is not clear to us what the mischief is and what the relevance of the guarantee is, but it is clear that the provision must be wrong in principle. The existing provision that allows for an offsetting adjustment on the other side of the transaction when any adjustment is made is a neat and simple double-entry type solution to what could otherwise be a serious injustice. It is clear that, in the absence of an entitlement to an offsetting adjustment, these arrangements could give rise to a double tax charge where a partial or total disallowance of interest is made and both parties are within the charge to UK corporation tax.The provision potentially puts UK taxpayers at a disadvantage compared with non-UK taxpayers who will often be able to achieve a corresponding adjustment through a double tax treaty adjustment.
	The amendment probes the Government on their attitude to the problem by seeking to delete sub-paragraph (5) in its entirety. I have to say to the Financial Secretary that I have seldom been in receipt of such unanimously perplexed sets of briefing notes from different qualified external advisers. I am sure that he will have seen some of the briefings and noted the genuine perplexity of specialist practitioners in this sector about what the Government are seeking to address, what the perceived mischief is and what the relevance of granting of an intra-group cross-guarantee is.
	I hope that the Financial Secretary will be able to explain all these things, and we will listen carefully to what he says. I assure him that the expert bodies that have expressed mystification will also look closely at what he says to see just how the provisions are intended to work. Are they really intended to apply to group cross-guarantees? Why are they intended to apply to them; what do they seek to address; and how will they work in practice? We will listen carefully to his reply before deciding how we should proceed.

John Healey: The hon. Gentleman is right to say that the private equity business is strong in the UK. Indeed, it is second only to that of the United States, but it is competing increasingly in a global market. We are clearly concerned about its health in the UK because it is an important part of funding, especially for many of our small and rapidly growing companies. However, I believe that some of the wider and dramatic impacts that some hon. Members claim that the schedule will have are hugely overstated.
	To set the scene for discussion of the amendments, it is important that the Committee remember that the loan relationship rules, which are the corporation tax rules that tax interest paid and received by companies, operate not by reference to the interest paid or received in cash but to the amounts of interest shown as accrued in the company accounts. It has always been necessary, as I think the hon. Gentleman will well know, to have special rules to deal with cases where a company is deducting interest in its accounts in respect of loans from connected parties where there is a potential for the manipulation of lending and borrowing to shelter company profits from UK tax.
	At the same time, it has always been recognised that such rules could bite harshly on smaller companies and on start-ups, particularly where there are close relationships with a relatively few venture capital providers. It is common for a lender in those circumstances also to take a small equity stake.

John Healey: I do not want to return to clause 11, which was being discussed when the hon. Gentleman asked his question. I do not know whether he will find my answer satisfactory. The principal purpose of clause 14 and schedule 8 is to anticipate the development of new avoidance arrangements. This is the answer to the hon. Member for Cities of London and Westminster (Mr. Field). By the scored amount in the current year for the revenue gain of the whole schedule, we are talking of only £5 million. Knowing what professional advisers are beginning to advise their clients, the point is to anticipate potential avoidance arrangements. Therefore, it is impossible to give the precise answer that hon. Members might wish for.
	The loan relationship connected party rules have included exemptions to protect venture capital investment in company start-ups and in early stage expansion. The changes made in the Finance Act 2004 clarified how the exemption applied in the case of certain sorts of foreign venture capital providers but did not otherwise affect the scope of the exemption. However, it has become clear that the exemption can be used not only for venture capital investments in start-ups and in growth companies but also to facilitate private equity investment in management buy-outs of large, long-established and profitable companies, and not only the ailing companies that the hon. Member for Cities of London and Westminster was concerned about.
	Amendments Nos. 20 and 27 would therefore undo the very purpose of the changes that we are introducing. They would mean that the exemption was not targeted on the growth companies and the start-ups for which it is intended. The benefits of the venture capital exemption would continue to be available for all private equity deals, management buy-outs and mature low-risk businesses with a steady and well established cash flow, and would certainly be less risky than the growth businesses that we want to encourage.
	The amendments would also allow the other avoidance opportunities that are closed down by paragraphs (2) and (3). I hope that on that basis the hon. Gentleman will consider withdrawing his amendments.

Mark Field: The Minister will be glad to know that the Opposition will withdraw the amendments. In part, they were probing amendments. It was important to have some discussion about whether small and medium-sized enterprise distinctions should be made at all within the context of the Minister's proposals.
	We are rightly proud of the strength that the UK has in our private equity business. It is particularly important that that is maintained, not least given the strength of the two great economic superpowers of the future—China and India—and our links with those countries. Inevitably, there will be a significant role for a number of joint ventures. Much venture capital will find its way in various different guises either in the UK or beyond that. It is therefore important that the pre-eminence of our private equity business is seen to be maintained.
	Clearly, the Opposition are being lobbied, just as the Government are lobbied, and, inevitably, the Armageddon and appalling outcomes that are sometimes presented can be exaggerated. Equally, my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) rightly articulated one of the Opposition's concerns when she referred to the notion of such overseas arrangements being somehow nefarious and having complicated structures, which is an inevitable part of that sort of transaction.
	I have some understanding that the Treasury wishes, as the Minister rightly puts it, to anticipate new avoidance arrangements Inevitably, the best tax lawyers and tax structurers are likely to be one or two steps ahead of the game, so it is legitimate for the Revenue and the Treasury to try to have such an understanding. Certainly, it surprised me when the Minister said that the proposed revenue gain was as little as £5 million, which is very much small fry. None the less, one hopes that, if there is to be a genuine move towards anticipation of new avoidance arrangements, there will also be a recognition that it is wrong—we will no doubt discuss this in greater detail in Committee in the next two weeks—for any of this legislation to be retrospective or retroactive. If there is to be a policy from the Treasury to anticipate avoidance arrangements, surely it is part and parcel of that, and fair game, to ensure that retroactivity and retrospection is kept to an absolute minimum—nil from the Opposition's perspective.
	We have had a reasonably amicable, albeit shortish debate on this matter. Again, the Liberal Democrats—the real opposition—have not sought to make any contribution, which is a matter of some surprise. Silence is golden—or perhaps orange.
	We shall not press the matter to a vote. I beg to ask leave to withdraw the amendment.
	Amendment, by leave, withdrawn.
	Question proposed, That the schedule be the Eighth schedule to the Bill.

Philip Hammond: I am certain that you will guide me, Sir Michael, if I seem to be falling into that trap.
	We are discussing an extension of the transfer pricing rules to cover loan relationships and the capture of a group of people who were not hitherto caught by schedule 28AA, which the Government clearly feel is a necessary measure, and which, in its current drafting, the venture capital and private equity industry sees as an attack on an established model that has operated within parameters agreed with the Inland Revenue over a not inconsiderable period. As I said earlier, a degree of concern exists about the way in which some of these measures have been badged as anti-avoidance.
	When a change is announced by the Government to a treatment that was agreed in 1998, and which has been constantly reviewed by the industry and the Treasury since then, it is bound to lead to some concerns. I want to quote from a letter that the British Venture Capital Association sent to the Chancellor on 23 May. It wrote:
	"The apparent change in policy by the Inland Revenue over the agreement we reached in 1998 about the application of transfer pricing to private equity limited partnerships is particularly unfortunate, not least because of the level of distrust this move has now introduced to the relationship between the industry and the Inland Revenue."
	This is a widely drafted provision, extending existing transfer pricing rules and restricting a deduction that has been available for accrued interest and discount. It will affect the pricing of transactions.
	A subject of concern that covers the whole schedule, including parts that have not been addressed in detail today, is the way in which it catches banks. We have certainly had that discussion, but I suggest to the Financial Secretary that in some circumstances the schedule could also catch corporate joint ventures, through what is effectively the disapplication of the 40:40 rules in paragraph 4 of schedule 28AA to the Income and Corporation Taxes Act 1988. The Minister spoke of seeking to level the playing field between partnerships and corporations. That measure will disadvantage corporate JVs and bring them—perhaps unintentionally—within the scope of the schedule.
	Many private equity funds have for many years been structured as multiple parallel partnerships, for very good commercial reasons. Private equity houses will typically seek to ensure that in any fund that is investing, they have an appropriate identity of interest between investors in that fund. It might be done on a geographical basis: German investors might be collated in a fund that might then have a bias towards investing in German concerns. Ethical investment funds in the United States particularly, but increasingly in this country, have restrictions—for obvious reasons—on the types of investment that they are willing to make. Indeed, Sharia investment funds have such restrictions. It makes perfect sense for a fund to be structured as multiple parallel partnerships to try to ensure that investors can be grouped in an appropriate way—and, overarchingly, in a way that matches different classes of investors' appetite for risk with the opportunities that are available. Many of the investors in private equity concerns are quite risk-averse organisations, pension funds being the obvious example. As I hope we have established this evening, it is not the case that multiple partnership structures are all or mostly tax-driven. That is not to deny that some funds are using those structures to generate tax saving, as Conservative Members have clearly recognised.
	This is a important industry for the United Kingdom. Private equity-backed companies generate £187 billion worth of sales and £23 billion of taxes every year. The industry in Britain is second only to that in the United States. It brings a huge dynamism to the economy, whether it backs growing businesses—the kind we all want to expand so that they can become larger, eventually perhaps going to the public markets for capital—or whether mature, sometimes ailing, businesses need the support of new capital funds and the close attention that private equity houses can often provide.
	The breaking of that 1998 consensus between the Revenue and the industry without prior consultation and with retrospective effect—I shall have something to say about the retrospective effect and the timing of implementation provisions in proposed new sub-paragraph (4) in a moment—has in itself seriously damaged the UK's attractiveness as a location for private equity and venture capital houses, and, indeed, its attractiveness as a destination for investments by those funds, wherever they are based.
	Of course, although the Government have approached this as a tax-avoidance loophole-closing measure, some of the loopholes are rather small—more like the eyes of needles, to judge by what the Minister was saying earlier. The real danger is that the end result could be less tax, through less private equity investment and less business generated in this country, and more business failures and job losses as companies that might have been rescued and turned around by private equity funds are left to their fate. There is no doubt that uncertainty will be created in straightforward and established transactions. Mezzanine debt, with or without equity warrants attached—which, ironically, is intended to reduce the tax-reducing interest chargeable—could now become a less attractive instrument because of the doubt surrounding its treatment.
	One issue that has not been touched on so far this evening is the relative attractiveness and complexity of shareholder debt financing, which is an important part of the private equity deal. Typically, private equity houses are burdened with large funds—if one can imagine such a thing—that they need to invest. Such funds often exceed their capacity to make equity investments, and a standard technique that they employ is to provide part of the debt financing required in the package as shareholder debt financing.
	Until now, most people felt it reasonably easy to price shareholder debt financing. However, such financing will now be brought within the transfer pricing rules through the application of proposed new paragraph 4A, and such people will be required to show that the debt has been priced at arm's length. That will be much more difficult than might be thought, because most comparable transactions that would form the basis for demonstrating to the Revenue that the pricing of an arrangement is arm's length will be caught within the new rules. Therefore, no clear and substantial body of shareholder debt financing will exist that falls outside proposed new paragraph 4A. That in itself will create uncertainty and it will undoubtedly make shareholder debt financing a less attractive instrument.
	As we have already heard this evening, there is doubt surrounding the status of leading banks where another division of the same bank might be involved as an equity investor in the private equity house. There are also concerns about the workability of the small and medium-sized enterprise exception at paragraphs 2(3) and 3(6). As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) set out clearly, there is a real fear that, despite the best intentions of Her Majesty's Revenue and Customs, very few private equity groups will in fact qualify as SMEs and thus gain exemption from the schedule's timing of interest provisions. We still do not understand the need to eliminate double counting provisions, as provided for in sub-paragraph (5), but we accept that the Minister is engaged in an ongoing voyage of discovery in this regard. We hope to hear from him in due course.
	The changes to the rules on the timing of interest payments where there is a loan relationship is a specific problem for the private equity model. It presents the very real possibility of deductions becoming available only at the exit point, typically after four or five years when the private equity investor exits. There is a real danger that the accrued interest deductions will, by that stage, be so large as to be incapable of being used up in year, and thus are likely to become unrelievable because there will not be sufficient non-trading income in the vehicle to offset the loss during the year. Trapped losses will be delivered, which is bound to have an effect on the pricing of a private equity deal, and they will not have been priced into the deals that have already been done.
	The Revenue says that about £20 million is at stake in respect of changes to the rules on the timing of interest deductions. The industry, as the Financial Secretary knows, believes that as much as £1 billion of loss deduction is at stake, so there is a huge gap between what the industry perceives and what the Government perceive. It is a shame that there appears to have been no opportunity for the two sides to get together in order to understand each other's point of view or for the Government to create some reassurance. There is a very uncertain position and genuine concern within the industry that the deductions will be disallowed on a much greater scale than envisaged by the Government.
	I hope that the Financial Secretary will respond to this short debate, as I would like to put this question to him. Given that the interest deduction is allowed only when arm's-length terms are in place, is there any need for special treatment of shareholder debt? I see no such need, and we have already asserted that paragraphs (2) and (3) have no necessary place in the armoury that the Government are seeking to create. They already have the weapons to deal with shareholder debt that is not priced at arm's length. The other point that arises from the changes made in those paragraphs, I am told by the experts, is that we are likely to see zero coupon notes disappearing as a financing mechanism as a result of the difficulty of showing that they have been priced at arm's length.
	All that, Sir Michael, is interfering with a private equity funding model that works; that has been shown to work over a number of years; that has delivered for the UK economy by financing hundreds, perhaps thousands, of businesses throughout the country, as well as fuelling a vibrant sector of the financial economy itself; and that has been agreed on and run for many years with the full understanding and acquiescence of the Inland Revenue. The Government are taking an extremely dangerous step in unravelling that long-agreed model.
	It is not clear why persons caught by the extension of the rules in paragraph 2(2)(b), (c) and (d) are not subjected to the benefit of the grandfathering provisions in paragraph 4(3). That sub-paragraph provides a grandfathering provision for many of the caught transactions, but it excludes those falling within the scope of schedule 28AA under those sub-paragraphs of paragraph 2. Interest on loans made by such persons—those who are not entitled to the benefit of the grandfathering provisions—will be subject to the late interest rules from 4 March 2005, not 1 April 2007. It is not clear to us why that sub-class of investor should be disadvantaged in that way.
	There is also confusion about the wording of paragraph 4(3)(b). The debtor relationships to which transitional provisions apply are those entered into before 4 March 2005 and
	"not varied after that date".
	That seems fairly straightforward—but the line goes on to say:
	"or not varied until after that date".
	I do not pretend to the Committee for a moment that we have dreamed up this query ourselves, but I can tell the Financial Secretary that some of the sharpest minds in the specialist tax advisory sector do not know whether the two phrases in the line
	"not varied after that date, or not varied until after that date"
	together effectively embrace everything, as would appear on a plain English reading of the text, or whether they are intended to mean something else. Can he tell us whether those two phrases together cover all existing loan relationships? Is that the intention, and if so, could it be stated a little more clearly? I am sure that the industry would be pleased if it could.
	There is an issue of retrospection with all the provisions in the schedule. Deals in the sector are typically done on the basis of cash-flow projections, which will have been built by factoring in an interest deduction, and assuming that a lower rate of corporation tax would be payable in the early years. As the Minister will know, when we consider the discounted cash flow of a business forward, the exact time when the deduction comes and the cash hit is taken is very significant. Moving it forward from the fourth or fifth year to the current year, by not allowing the deduction to be taken until exit, is potentially very significant—and that has been done without warning or consultation. The impact will fall on private equity businesses. Their liability to pay the interest will not change, but they will not get the corporation tax deduction that they have factored into their cash-flow projections. They will have to make the interest payment provided for by contract, and also make a corporation tax cash payment that in their business model and their cash flow forward they will have assumed would not have to be made at that time.
	Has the Treasury really looked at the case for a permanent exclusion of all pre-March 2005 debt, so that there will not be that element of retrospection and transactions that have already been priced and contracted for, where a loan relationship already exists, will be allowed to run their natural course? In the case of a private equity financing, that would typically be only four or five years; most private equity financiers would be unhappy if they were not out by the end of five years.
	That brings me to another important point—a very different point, but germane to the Government's assessment of the overall impact of the schedule. I am thinking about the joined-up government approach, and about considering not just what the measure will do for the Treasury's revenues and what it will do to the industry, but its relationship with other Government policies and initiatives.
	Schedule 8 will have an impact on the private finance initiative. The financing of PFI deals tends to be structured in a similar way to private equity deals. There are good commercial reasons why PFI deals are structured in that way, and they are known by, and have been structured to benefit, the public sector. The PFI industry is aware that clause 40 and schedule 8 are intended for the private equity industry, but there is a concern—I am sure that the Treasury is aware of it—that a blanket application of the new rules would prejudice providers of PFI and push up the cost to the public sector. I know that Labour Back Benchers are deeply concerned about that possibility.
	A particular concern is that it is rare that profits are extracted from PFI contracts by investors without being subject to UK tax in their hands. The removal of a corresponding adjustment in the proposed legislation at paragraph (1)(5) will affect investors in PFI contracts that are caught by the new legislation, given that the investors in PFI contracts are nearly always subject to UK corporation tax. That will make PFI deals less attractive as an investment and will potentially make existing PFI contracts loss-making, which would hardly send the message that the Government would want to the industry as a whole, given the central role that PFI plays in their financing strategy and in enabling them to maintain their desired levels of public investment without breaching the Chancellor's sustainable investment rules.
	As all members of the Committee will be aware, PFI contracts tend to run for much longer terms than private equity deals, so any change of the rules in respect of existing deals—unwelcome as it will be to private equity financiers—will wash out within four or five years maximum, because that is the maximum length of time that private equity investors expect to be in an investment. However, any application of the new rules to PFI would affect those contracts disproportionately, as the impact would be felt for a much longer period—10, 20 and 25 years are not atypical—and the net present value effect of rule changes that impact on the cash return over 20 years would be significant, as the Financial Secretary will be the first to grasp.
	In addition to the impact on existing contracts and in the absence of certainty about how PFI contracts will be caught in a net that was, admittedly, cast for a different purpose—to deal with private equity financing—new PFI contracts will surely be priced by providers on the assumption that these rules will apply. Such a move could make PFI more expensive for the public sector at a time when the pressure is on to try to make PFI deals less expensive. Indeed, given the general interest rate climate, one could probably expect that PFI deals would become generally less expensive, if not for these changes, which I might characterise as a potential own goal.
	It is imperative that the Government—perhaps the Financial Secretary will do so in his response—confirm that the new rules are not intended to affect PFI contracts. Existing rules can be used to deal with perceived abuses—for example, the Revenue's response already delivered to the proposed refinancing of older PFI contracts, which would be perfectly sensible commercial transactions. Applying the new rules would have an adverse impact on the public sector via higher costs and by making PFI less attractive as an investment, hence reducing competition for PFI projects and increasing the cost to the public sector.
	Throughout our consideration of the schedule and our amendments, we have tried to narrow the Government's focus and to get back to the intended core purpose. Indeed, we should like to get the Government to state exactly what target they are trying to hit, so that people fretting needlessly that they will be inadvertently caught hear a clear message from a qualified Government spokesman that it is not the Government's intention to allow them inadvertently to be damaged by measures proposed for a quite different purpose. For example, banks lending mezzanine finance need reassurance that they, or the companies to which they have lent, will not be involved in complex discussions with the Revenue that might lead to a loss of deductibility of interest, which in turn could lead to a reduction in the viability of the business in which the bank has invested and thus a reduction in the security against which the bank thought it was investing.
	Widespread concern has been expressed in the industry about the lack of consultation. There is widespread concern, too, about the way that the measures were badged as anti-avoidance provisions, implying that people in the industry who pride themselves on having stuck to a model agreed with the Revenue have in fact been doing something untoward.
	I shall quote again from the letter to the Chancellor from the chief executive of the British Venture Capital Association of 23 May, two days before the Bill was published. He says:
	"These proposals, if given effect, would seriously damage this industry and in our judgement could well be a deterrent to private equity to continue to increase its investment in the UK. This cannot be an outcome you either intended or would welcome."
	I certainly hope that it is not the outcome the Government intended, but with all that well-informed warning floating around, of which the Treasury is well aware, the Opposition must insist that the Government reconsider the matter and address the concerns that are being expressed.
	There will be deferment until 2007 in several areas as a result of paragraph 4, so the need may not be as pressing as the Government have suggested—the abuse at which the rule changes is aimed is not as widespread as the Treasury may fear. The real impact of the sudden introduction of that new regime will be on deals in progress, under discussion or being negotiated when it is announced. Uncertainty as to the need for review of those arrangements and uncertainty as to what will be deemed to constitute an arm's-length consideration in proposals currently being negotiated will inevitably lead to private equity deals currently under negotiation being priced up to reflect that uncertainty. That is bound to be bad for business.
	I suggest to the Financial Secretary that the sensible thing would be to leave the schedule out of the Bill—not to abandon it nor to give up on the intention behind it. In his press release, he has already signalled that 2 March will be his start date so that is clearly on the record for everybody to see. By pulling the schedule from the Bill, the Financial Secretary would have an opportunity to reconsider both the principle behind the measures being introduced and the detailed drafting. He would have an opportunity properly to consult the industry and users of private equity finance. He would have an opportunity to undertake a proper study of the likely impact of these measures and he could come back in next year's Finance Bill and present us with a much more tightly drafted proposal to tighten up schedule 28AA to the Income and Corporation Taxes Act 1988 and schedule 9 to the Finance Act 1996. I am sure that the Committee would be delighted to give a fair wind to that.
	Many concerns from many responsible and reputable sources have been voiced through us tonight. If the Financial Secretary does not want to listen to our concerns, he must at least be cognisant of the need to listen to the concerns of those responsible and reputable observers in the business world, the City and elsewhere. I know that they have been briefing him as they have been briefing us.
	Little will be lost by leaving the schedule out for another year. Even at this late stage, I urge the Financial Secretary to take that opportunity.

John Healey: We have had an extensive debate on the schedule, and the hon. Gentleman has made an extensive speech. I shall try not to retread old ground.
	Either deliberately or unwittingly, the hon. Gentleman has conflated the application of existing transfer pricing rules with the extension of those rules to specific areas in the clause. The transfer pricing rules are established; they are essential; they are accepted; and they protect huge amounts of revenue to the public purse. They have been in existence for more than 50 years, and they have applied to partnerships for years. The Bill extends the rules to specified areas to which they do not currently apply. The changes apply only from 4 March 2005, which is when the changes were announced. The clause and the schedule do not apply retrospectively.
	The hon. Gentleman talks about the venture capital industry being badged as an avoidance industry. Let me make it clear again that the Bill and the schedule are about the extension of transfer pricing rules. In fact, the letter that he quoted from the British Venture Capital Association makes it clear that its argument is about the application of existing transfer pricing rules.
	There is a process for settling all disputes about the application or operation of tax rules. Her Majesty's Revenue and Customs applies and manages the operation of the tax system, and taxpayers have a right to contest the way that it does that. The legal system will settle matters of fact. There is a dispute about the enforcement of the existing rules, but it is not relevant to the Bill, which is about the extension, not the application, of transfer pricing rules. It is about their extension to syndicates in which companies are owned by more than one equity partnership, which means that they are, at the moment, able to get tax deductions beyond the rules. It is about heading off the fragmentation of ownership to get around those rules and dealing with what we now see as advice from professional advisers about how to do just that.
	We are not in any way suggesting in the Bill that all private equity finance is somehow based on tax avoidance, but we are aware of professional advisers promoting opportunities for structuring ownership and financing of companies to get around existing rules. The purpose of the schedule and the clause that enables it is to protect likely future revenue loss. The hon. Gentleman therefore needs to understand that any suggestion that the cost to the private equity industry will be £1 billion or more is hugely wide of the mark. That could be the case only if the rules disallowed all the interest costs arising from private equity deals, and the rules will not do that. Companies will still be able to obtain tax deductions for interest on debt finance up to the arm's-length amount, and we have had a detailed discussion about that.
	The hon. Gentleman mentioned the private finance initiative for the first time today. Let me make it clear that no changes are being made to the existing transfer pricing rules that apply to many PFI deals. We do not expect the changes to have any effect on PFI funding and there is no evidence of any impact on PFI deals since the changes were announced in March. The changes close off loopholes to prevent companies from restructuring to get around the existing rules. They do not alter the way in which the existing rules apply to companies involved in PFI deals or other companies. The hon. Gentleman might like to know that HMRC has had discussions with PFI representatives, who I understand have been reassured. However, I am happy to hear of any further concerns that they may have.
	In summary, the purpose of the changes is to make the tax treatment of company finances fair for all companies, regardless of their ownership or financing structures. The changes introduced by the schedule will ensure that there is a coherent and consistent set of tax rules for companies with different ownership structures, including, albeit not exclusively, companies controlled by private equity investors. The new rules are in line with those of our major competitors, such as Germany and the USA. They will sustain the UK's position as an attractive location for international investment, and I commend the schedule to the Committee.
	Question put, That the schedule be the Eighth schedule to the Bill:—
	The Committee proceeded to a Division.

Richard Spring: The clause amends the European Commission parent/subsidiary directive and is purely technical. It provides for profits distributed by an EU subsidiary to its parent be exempt from withholding tax. The Verkooijen case at the European Court of Justice involved a Dutch taxpayer winning the argument that dividends from a Belgian company should be taxed in the same manner as dividends from Dutch companies. The current UK tax regime exempts UK dividends but taxes overseas dividends, and the ECJ would almost certainly view it as discriminatory. Will the Financial Secretary consider whether that change in the legislation is irrelevant, because the main legislation to which it relates will be struck out under ECJ principles?

Richard Spring: The measure is partially retrospective. [Hon. Members: "Which amendment?"] I am discussing amendment No. 5. The anti-avoidance measure in clause 44 applies to accounting periods beginning on or after 2 December 2004, and it catches income and profits arising after 1 January 2005 for most groups. The 2 December date has been included to prevent the implementation of certain avoidance structures, but clause 44 is widely drafted and may catch certain transactions because of general differences between tax regimes on when they tax specific items of income and expenditure. We want to tighten the definition because the controlled foreign company tests—the CFC tests—are applied annually. Proposed new subsection 1A requires the adjustment to be made in respect of that particular accounting period, and it does not take into the account the fact that the very same income or expenditure may fall into the charge to tax in a later period.
	CFC rules apply where an overseas subsidiary of a UK company is subject to a 25 per cent. lower rate of tax than the UK charge and does not meet any of the exemptions from the CFC rules. A tax rate 25 per cent. lower than the UK tax rate is determined by computing the taxable profits of the CFC under UK tax law principles. At the heart of this issue is the fact that the clause prevents tax planning whereby income that is not taxed in the UK is taxed overseas to inflate artificially the rate of overseas tax to get above the limit. These structures normally work so that the post-tax profit stays the same, increases or reduces marginally, while the pre-tax profits and tax charge overseas are increased by roughly the same amount.
	The amendment would limit the clause from having too wide an effect. Many items are taxed in the UK in a different accounting period from that in which they would be taxed in an overseas jurisdiction. For example, unrealised loss on a bond would not be tax-deductible until it became a realised loss in territories such as Belgium, the Netherlands or the Channel Islands, but would be deductible in determining the comparable UK tax bill on those profits. These rules would impact on tax deductions for capital allowances and tax depreciation. It should be noted that that will cause a problem, as virtually all other major countries give tax relief for capital expenditure over a shorter period than does the United Kingdom.
	There are other areas where the timing of tax treatment differs between countries. With certain exceptions, interest on bank loans in the UK is deductible when it accrues. Typically, in the UK interest income is taxed when accrued and elsewhere when received, as in Ireland and Poland. Amounts due to be paid for genuine services to connected parties are often taxed or tax-deductible when paid. For example, Estonia does not tax profits until they are distributed. For income taxable in the overseas calculation in the period, but in the UK in an earlier or later period, the Bill as drafted would mean that the overseas tax bill was deemed to be reduced by the local tax suffered on that income when seeking to determine if the overseas tax charge was 25 per cent. lower than the corresponding UK charge. If the overseas tax charge was less, the quantum of UK tax that would then be levied on the direct UK parent would be increased, hence increasing the UK tax levied on that UK parent without there being a corresponding adjustment in the period when the position reversed.
	Knitting that together, it is possible that the European Court of Justice may rule that the CFC rules cannot be used to impose a tax charge on UK companies based on the profits of subsidiaries located elsewhere in the European Union—[Interruption.]

John Healey: More than 20 countries have adopted controlled foreign company legislation including nine European Union member states. The CFC rules stop UK companies avoiding UK tax by diverting profits to low-taxed foreign subsidiaries. Some groups have artificially provided their subsidiaries with certain types of income. Others have arranged for subsidiaries to have an apparently high rate of tax to be repaid to a different group member. Thus the company appears to have paid a high level of tax when in reality it has done so such thing. All such devices are designed to distort the application of the lower-level-of-taxation test. The clause amends the operation of the test to prevent artificial distortions. It contains a timing rule to prevent CFCs manipulating their accounting periods to defer the application of this legislation.
	The hon. Member for West Suffolk (Mr. Spring) raised the case of Cadbury Schweppes. We do not believe that the operation of our CFC rules breaches the European treaty. As in other aspects of the corporation tax system, we will strongly defend our system against challenges under EU law. I trust that we would have support from the Opposition for so doing.
	The Cadbury Schweppes case has not yet even been heard by the European Court of Justice. It is pointless to speculate now about the outcome or the potential costs.

John Healey: The hon. Gentleman follows these matters closely enough to know that the Advocate-General's opinion is not always followed by the European Court of Justice. It is the judgment of the court that counts. The court cannot come to its view or its verdict until it has heard the case, which it has not yet done. I was interested to hear the hon. Member for Carmarthen, East and Dinefwr (Adam Price) made common cause with the Conservatives. Anyway, he asked a specific question, the answer to which is that in response to a specific request by Germany that the impact of ECJ decisions on member states' finances is discussed by ECOFIN, the ECOFIN meeting on 7 June agreed that our presidency in the latter part of this year should host an informal high-level discussion among member states, and we are happy to do that. I cannot agree with either of the amendments tabled by the hon. Gentleman—one would lead to the CFC rules becoming inoperable, while the other would allow the precise manipulation of the rules that we are seeking to counter to continue. I urge my hon. Friends to resist the amendments if they are put to the vote.

Mark Francois: I beg to move amendment No. 37, in page 58, line 38, at end insert—
	'(1A) After the coming into force of this section, any dispute of the nature referred to in subsection (1) shall be dealt with under the compulsory jurisdiction rules within the meaning and operation of section 226 of the Financial Services and Markets Act 2000 (c. 8) (compulsory jurisdiction of the financial ombudsman service).'.
	The Government's intention in clause 69 is to abolish the bespoke complaints service for National Savings and Investments, the so-called statutory adjudicator, and to transfer the responsibility to the voluntary jurisdiction of the Financial Ombudsman Service. In essence, our amendment would alter that to the compulsory jurisdiction of the ombudsman under the auspices of the Financial Services and Markets Act 2000. Although clause 69 is one of the shortest clauses in the Bill, that is an important change nevertheless.
	As a body, National Savings and Investments accounts for a considerable amount of public savings outside of property and the pensions sector. According to the latest estimate from National Savings and Investments, which I obtained today to get the most up-to-date figure possible, it currently has some £68.7 billion under management. That includes a variety of products, of which some of the best known to Members of the House and the public would be premium bonds, national savings certificates and income bonds. A rough breakdown is as follows: £26.8 billion is currently invested with National Savings and Investments in premium bonds, which is a very considerable amount of money; £17.1 billion is invested in national savings certificates; and some £7.6 billion is invested in income bonds. Moreover, given the nature of National Savings and Investments business, the vast bulk is held by private individuals rather than by financial institutions, pension funds or banks. [Interruption.] The Minister says from a sedentary position that that is what worries him. I think that in some ways the change in regulation worries us too.
	Several million people hold these products, so the change potentially affects a considerable number of the constituents of every Member. It is right and proper for those people to be given an adequate level of protection for their money, not least because they are effectively lending it to the Government. The Government undoubtedly need that money. Given the present fiscal position, it seems likely that the Treasury will become even more reliant on National Savings and Investments over the next few years, not least as a device with which to seek to ameliorate the effects of the Chancellor's burgeoning black hole in the public finances. A host of independent economic commentators—[Interruption.] Ah, Labour Members have woken up. The Organisation for Economic Co-operation and Development, the International Monetary Fund, the National Institute of Economic and Social Research and the ITEM Club all agree that the Chancellor now has a structural deficit of between £8 billion and £12 billion in the public finances. Furthermore, the situation is deteriorating rather than improving.
	The Chancellor increasingly needs the money provided by National Savings and Investments because the projections for the deficit have increased by some £6 billion since the last Budget alone. He is now projected to run an overall Budget deficit of some £34 billion this year. Over the next five years combined, that amounts to a massive £168 billion of expenditure over revenue, even if we do not include all the off-balance sheet debt of which we heard earlier this evening.
	The Government are therefore likely to look increasingly at National Savings and Investments to try and help shore up the public finances, which all the economic commentators agree are in trouble. Let me give just one example of what National Savings and Investments is trying to do. The limit on premium bonds that can be held by a single individual has been increased from £20,000 to £30,000 to encourage extra purchases, although the odds on winning the £1 million jackpot have been reduced. Over the last three years, the amounts invested in premium bonds have increased fairly significantly. In May 2003, £20.9 billion was invested in them; today, the figure is £26.8 billion. That is a significant increase over three years, given that the product has been running for decades. The drive for extra investment by National Savings and Investments on behalf of the Government is clearly already well under way. I think we can agree on that beyond peradventure.
	The current National Savings and Investments literature also makes a virtue of having an independent complaints procedure as part of the sales pitch. I have here a copy of the booklet produced by the Government to try and market these products to the public. I went to considerable lengths to obtain a copy: I picked it up from the post office in Central Lobby on Friday. Under the heading "Our commitment to you", the booklet says
	"National Savings and Investments subscribes to the Banking Code and has a formal complaints procedure with an independent arbitration scheme."
	That point is part of the marketing test in the booklet. It is not tucked away in 8-point type at the end under the "Terms and conditions" heading. It is not part of the small print; it is part of the sales pitch itself. So the Government have been relying on—playing on—the fact that they have an independent arbitration scheme to help sell these products to members of the public, including those who might frequent the post office in Central Lobby, even though the changes in the regulation of these products will be introduced in less than three months from today.
	There is also the related issue of double standards. Via the Financial Services Authority, the Government have sought to foist compulsory compliance rules on a whole plethora of financial institutions, to the point where it has led to quite a falling out behind the scenes between the Prime Minister and the Chancellor. So there is absolutely nothing new there, but it is a bit rich that the Government want compulsory regulation for just about everyone else—including most building societies, banks and investment product providers—yet when it comes to people who are effectively lending money to them, suddenly, a weaker voluntary code will do nicely. Where is the level playing field in all this?
	The Government's consultation document on the proposed change included a key sentence, which states that moving responsibility for adjudication from the statutory adjudicator to the Financial Ombudsman Service
	"would first require some modifications to the rules concerning FOS's voluntary jurisdiction, which are made by FOS and approved by"
	the Financial Services Authority. That being the case, perhaps the Minister will have more to say tonight specifically about those revisions and exactly what they will include, so that all Members of this House, and all members of the public who want to continue to invest in National Savings and Investments, can hear exactly how those changes are likely to be implemented. [Interruption.] As I speak, inspiration is arriving from afar. I am pleased to see that the Minister will be suitably briefed, even if he was not before he arrived.
	As Ministers know, we Conservatives have commented on the sometimes heavy-handed nature of the FSA.

Brooks Newmark: The abolition of a dedicated complaints service for national savings and its placing under the voluntary jurisdiction of a financial ombudsman causes me great concern for two reasons. First and foremost, I am concerned about consumer protection and public confidence. Many investors in national savings are, in effect, widows and orphans—in other words, the most vulnerable investors in our community—yet the Government propose to get rid of a dedicated specialist complaints handler in exchange for some form of ombudsman who, in my opinion, does not have the same teeth. The Government are thereby diminishing public trust in a very important area of investments with the investor community.
	Secondly, it once again looks like—and I believe that I am quoting my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond)—another case of the Government saying "do as I say, but not as I do". On the one hand, through the auspices of the Financial Services Authority, the Government foist petty compulsory rules on everyone else, but on the other hand, they try to have a weaker voluntary code of conduct for themselves. I would suggest to the Minister that the Government should set the same standards of probity and the same code of conduct for themselves as they expect from everyone else in the investment industry. I therefore support the amendment.

Ivan Lewis: Thank you, Mrs. Heal. I always bow to the Chair—especially when you are in it, if you do not mind me saying so. [Hon. Members: "Get on with it."] I shall move straight on to the amendment. To respond to the debate appropriately, however, it is only right that I should refer to the contribution by the hon. Member for Braintree (Mr. Newmark); he is entitled to a response from me. I just want to tell him that the word is "ombudsman", not "umbudsman", as he pronounced it. If he looks at the piece of paper that the Whips wrote out for him, he will see that the word is spelt with an o, not a u. Clearly he could not read their writing as easily as he would have liked.
	The amendment attempts to transfer responsibility for the resolution of disputes against National Savings and Investments to the compulsory rather than the voluntary jurisdiction of the Financial Ombudsman Service. In response to what the hon. Member for Richmond Park (Susan Kramer) said, I shall spell out why that cannot be done. National Savings and Investments is not currently eligible to enter under the compulsory jurisdiction because it is not regulated by the Financial Services Authority. It could not join the compulsory jurisdiction alongside FSA regulated bodies without substantial amendments to both the Financial Services and Markets Act 2000 and subordinate legislation. This is beyond the scope of the Finance Bill.
	Furthermore, National Savings and Investments cannot be directly FSA regulated under its current business model, because as the Government's retail debt financing arm, it does not hold liabilities and does not have the capital adequacy requirements of privately owned financial institutions, both of which are necessary conditions for being FSA regulated.
	Under the voluntary jurisdiction of the FOS, customer complaints against National Savings and Investments will be handled in the same way as under compulsory jurisdiction—that is a direct response to a question that I have been asked. This will deliver greater simplicity for customers, who will have access to the same dispute resolution process in the case of complaints against National Savings and Investments as with those against other financial service providers.
	To give a further guarantee to hon. Members, it is important to say that National Savings and Investments is committed to voluntary jurisdiction, and that that commitment will be embodied in its framework document, which publicly states the aims of the agency, how it is managed and its relationship with Government, to ensure that it is bound not to unsubscribe at any time. A further guarantee is the fact that the rules of the voluntary jurisdiction scheme put conditions on participants withdrawing from that scheme. The transfer is being implemented so as to ensure that National Savings and Investments customers have continuous right of recourse to a single dispute resolution scheme.
	I hope that Opposition Members will now understand that the amendment is not feasible, practical or possible in the context of the Bill.

Mark Francois: Having opened for the Opposition on clause 11 at 3.30 pm, I am pleased to be the alpha and omega of this debate by winding up the debate this evening. I stress again that, despite the fact that we have had a little frivolity in the Chamber, which is no bad thing at this hour, the matter is actually very important. We are discussing some £69 billion of funds under management, and the saving products in question are held by millions of Britons. For many of them, they represent a large proportion of whatever savings they have, other than their property, if they own it. So we have sought to ensure tonight that those Britons are adequately protected as this change goes through.
	I commend my hon. Friend the Member for Braintree (Mr. Newmark) on taking the trouble to speak on this amendment—[Interruption.] Well, it would have been nice if we had had some Labour Back Benchers who had thought the same. It is to my hon. Friend's credit that, as a new Member, he can tell his constituents that he was here until well past 10 pm to speak on their behalf.
	I also thank the hon. Member for Richmond Park (Susan Kramer) for making a contribution to the debate also. We have had several debates in which the Liberal Democrats have kept their powder very dry—arid, in fact—but the hon. Lady finally decided to chip in. I am glad that she took the trouble to do so. It was, however, unusual not to see a single amendment from the Liberal Democrats all day. We hope that they will work a little harder in Committee.
	It is possible to make the changes that we suggest. This is an important matter of public protection and we have set out why, given the Government's fiscal position, it is important that the public can be reassured on it. We have placed our views on the record and they have been heard by the House. I am sure that the debate will continue, but for the moment I beg to ask leave to withdraw the amendment.
	Amendment, by leave, withdrawn.
	Clause 69 ordered to stand part of the Bill.
	Bill (clauses 11, 18, 40, 43, 44 and 69 and Schedule 8) reported, without amendment; to lie upon the Table.

Chris Grayling: I join the Leader of the House in paying tribute to Lord Kirkwood for the work he did as a Member of this Chamber. We all have our party political divisions, but I am sure that the Leader of the House will agree that Lord Kirkwood had a distinguished career in this place. He will be a hard act to follow on the House of Commons Commission. I am surprised that no Liberal Democrat Member has seen fit to join us in paying tribute to him.
	If I were minded to follow the precedent set by one of my predecessors, my right hon. Friend the Member for Bromley and Chislehurst (Mr. Forth), we should be at the start of a 90-minute debate. Happily, I am not of that mindset—[Interruption.] Ah, we have a Liberal Democrat. The hon. Member for Hazel Grove (Andrew Stunell) has just entered the Chamber. He missed the tributes paid to Sir Archy Kirkwood from both sides of the House, so I repeat that, notwithstanding party political differences, he had a distinguished career in this place. I am certain that those words will be echoed in a moment. We are grateful to him for his work on behalf of the House.
	I have no doubt that the hon. Member for North Devon will continue that work and I look forward to working with him on the House of Commons Commission in the months ahead.

Linda Gilroy: That is well worth considering. Indeed, I think that the South West of England Regional Development Agency has some such plan for the region as a whole but, given the disparities that we have at the Cornwall, Plymouth and Devon end of the region, something that would help focus on whether the RDA is paying sufficient attention to addressing those disparities would be valuable.
	If we are truly to build on the inspiration that has been offered to us, there are implications for everything from public transport to waste management, from realising the potential of all our young people and ensuring that their skills can contribute to this exciting development at all stages of life to ensuring that we have sufficient housing as well as support and leisure opportunities for older people. "Ideas for Change" sets out the council's ambitious programme for reinvigorating the education offer from pre-school years to post-16 skills in a way that complements the further and higher education offer in the city. We will need to capture the imagination and support of central Government to help us make that programme happen and it is very important that it does happen, not just in its own right to meet education objectives but because it is the key to knitting together the whole city in a way that makes the citizens of Efford, Eggbuckland, Estover, Keyham, St. Budeaux and Honicknowle continue to feel that they matter as part of this great enterprise too.
	Growing capacity at a pace that ensures our infrastructure development matches general development will need careful thought, understanding and commitment. Plymouth is going through a very exciting period in its history. The scale of regeneration taking place is second only to the post-war reconstruction period that followed the destruction of large parts of the city centre in world war two. That gave rise to the opportunity for a radical new plan for Plymouth prepared under the leadership of Patrick Abercrombie and published in 1944.
	During the intervening period, Plymouth may not always have realised that vision, often being on the threshold of significant new development just as boom turned to bust in the economic cycles that prevailed in the 1970s and 1980s. As the city moved into the 1990s, it was in a period of decline and its confidence was low. A number of economic and social factors contributed to this: a decline in the defence sector, vulnerability in manufacturing industry, low levels of entrepreneurship, high levels of unemployment, an inability to attract private sector investment and a lack of critical mass in large private sector companies to support indigenous growth, low incomes and low skills, and areas of extreme disadvantage including, on the 1995 index of local conditions, St. Peter's ward, which had the unenviable label of being the poorest ward in England.
	We now stand, however, on the brink of the greatest challenges since the war with the bold and exciting new vision developed by David Mackay for the centre of the city—a vision that represents a step change of pace, intensity and quality of development in the city and that lays out a plan for reconnecting the city centre links with the waterfront and surrounding areas. "A Vision for Plymouth" has been prepared for Plymouth's local strategic partnership by MBM Arquitectes and AZ Urban Studio under the lead of architect, David Mackay. He and his team have an international reputation and are probably best known for master planning the Olympic village and port in Barcelona, reshaping that city too to make the most of its waterfront. David's listening and democratic approach has captured, for many, a 21st-century forward-looking vision for Plymouth that draws on the essence of the city and uses that to inform and shape the future.
	In developing the vision, David set about discovering what works for Plymouth and what is holding it back. What he produced tries to challenge perceptions and raise ambitions. It invites citizens to engage and aspire. It looks at opportunities for long-term growth. It aims to promote the interconnection of the city's different communities and neighbourhoods and provides the framework for a stronger, improved image of the city. It is already inspiring physical changes to the city and now, led by the Evening Herald, plans for launching a branding project later this year to help us to promote Plymouth's fresh image are well advanced.
	There are now many major opportunities in Plymouth to deliver accelerated growth as part of a quality agenda in line with the Government's sustainable communities plan and to tackle intra-regional disparities. Plymouth's city centre has a footprint the size of Manchester, but a population of only one third of that city's centre, or perhaps even less. The vision proposes that a greater intensification and density of mixed-use development should be introduced to include new residential, leisure and cultural evening uses. It outlines the scope for shared attractive spaces, including the new square in Armada way that the Deputy Prime Minister saw on his most recent visit, quality landmark buildings and improved public transport interchanges. The vision also proposes an area dedicated to cultural facilities and creative industries, which would incorporate the university, museum, library and other cultural activities.
	Sutton harbour is the main tourist area of Plymouth and also a working harbour with a thriving fishing industry. The vision proposes extending regeneration to the east side of Sutton harbour and towards the Hoe, with a mix of commercial and residential developments. The Hoe, of course, is Plymouth's promenade, with spectacular views across Plymouth sound, and it is one of the most impressive natural harbours in the world. The vision proposes new and refurbished visitor attractions with piers and walkways along the foreshore and water transport links from the Hoe to Sutton harbour, Millbay and beyond.
	To the west side of the city lies Millbay, which has been identified as one of the greatest opportunities for transformation. The vision proposes a major mixed commercial and residential scheme, a new boulevard to link the area to the city centre, a centre for marine science and research and a new cruise terminal.
	A tremendous amount has been achieved. The vision principles have been adopted by the city council and a design panel established that is based on Commission for Architecture and the Built Environment good practice and chaired by Dave Mackay. The Plymouth regeneration forum has been set up. A new public square at Armada way has been completed and a new mixed-use, 19-storey development has been approved for the city centre. A £170 million covered shopping mall is being developed by P&O Properties. A city centre company has been formed to create a business improvement district, and a partnership among the city council, English Cities Fund, South West of England Regional Development Agency and English Partnerships has been established for the regeneration of Millbay.
	Plymouth has unique potential not only for the south-west, but arguably nationally and internationally. We certainly aim to be the prime city for accelerated growth in the far south-west, with the potential to raise population from its present figure of 241,000 to 300,000 by 2026. We believe that the plan for the built environment can accommodate some 33,000 new dwellings by 2026, including 4,200 affordable homes by 2016. We aim to continue our almost unrivalled achievement of establishing 90 per cent. of that on brownfield sites. Alongside the plan for economic regeneration, we believe that that can significantly reduce intra-regional disparities.
	By continuing to invest in city growth strategy sectors to create new jobs, some 17,000 new jobs can be accommodated on 220 hectares of new employment land. We are doing much to achieve this on our own, but as a city with objective 2 status which is on the edge of a county with objective 1 status, we will need continuing support from central Government beyond the regional aid funding period.
	I have five things to ask of my hon. Friend. First, I hope that his response shows that he understands our city's potential. Plymouth is the second city of the region—the engine driving the far south-west economy. With his colleagues in the Office of the Deputy Prime Minister, I hope that he helps us to achieve the recognition we need from the regional development agency, the Government office for the south-west and other Departments, so that we realise that potential as fully as possible. It is essential to the Government's agenda of driving up economic performance that they address those regional disparities as well as build sustainable communities.
	With the sciences emphasised in the city growth strategy, we aim fully to realise the potential of the sector and achieve the recognition that Bristol has achieved in gaining science city status. We are already beating a path to the Treasury, with some meetings planned in the forthcoming months, to engage its interest and understanding of our potential and to find out how it which it might help us to achieve that status. I hope that my hon. Friend helps us to secure the attention of colleagues with responsibility for transport, environment, education, defence, health, and culture, media and sport—indeed, colleagues in almost every Department.
	Secondly, I hope that my hon. Friend will advise us on how we can ensure that current and imminent reviews of local government finance and the formula associated with it take account of the needs of authorities with fast growing populations, which Plymouth is certainly going to have.
	Thirdly, given the growth scenario, I hope that my hon. Friend will take a particular interest in how we might best present our case to the Government to secure a part of future waves of decentralisation of civil service jobs under the Lyons report, for which his Department has overall responsibility.
	Fourthly, with the average house price in Plymouth at £133,294 and average earnings of £17,605, average house prices are 7.6 times average earnings, and we need to explore ways of working with the Government and housing associations, such as the Tamar, Sanctuary and Devon and Cornwall associations, to develop appropriate models of affordable housing. As a Co-operative Member of Parliament, I am particularly keen to see the development of housing that is owned and controlled by the community through community land trusts and mutual home ownership, such as the models proposed by CDS Co-operatives and the co-operative movement. I hope that my hon. Friend shares my view that those models, which are designed to give an equity stake—a foot on the bottom of the ladder—in housing ownership, are much more cost effective because the transactional costs are lower. I hope that he and his colleagues in the ODPM will continue discussions with CDS to explore fully those models.
	Fifthly and finally, Plymouth would welcome the opportunity to show my hon. Friend what I have attempted to do justice to in this short debate. I hope that he will consider coming to see what is happening and meet some of the people who are involved in bringing that regeneration about. He will certainly be assured of a very warm welcome.

Jim Fitzpatrick: My hon. Friend the Member for Plymouth, Sutton (Linda Gilroy) has raised a number of questions that I hope are answered in my response. First, however, I congratulate her on securing this important debate. It gives us the opportunity to focus on a city that is increasingly recognised as a beacon for driving regeneration.
	Plymouth has given us a lot, not least the benefit of the previous hon. Member for Plymouth, Devonport, who stood down at the recent election. I pay tribute to the work of Mr. David Jamieson for what he did for the House, for his contribution as a Minister at the Department for Transport, but, above all, for the way in which he looked after his constituents. It is perhaps symbolic that the city which gave the House its first woman MP is now represented by two women MPs. I welcome the contribution that my hon. Friend the Member for Plymouth, Devonport (Alison Seabeck) made. If she makes Ministers work as hard for Plymouth as my hon. Friend the Member for Plymouth, Sutton does, the city will have no complaints.
	My hon. Friend the Member for Plymouth, Sutton has beaten a path to our door, championing Plymouth's embrace of the urban renaissance agenda. Many hon. Members will have had the benefit of attending the presentation that she sponsored earlier this year in Parliament on the vision for regenerating Plymouth drawn together by the city's partners, led by the city council and its leader Tudor Evans, and catalysed by Mr. David Mackay, who drew on his experience of similar work in Barcelona. It would be difficult to find a city to which the urban renaissance agenda is better suited. Plymouth is a city with a great heritage. It became a focus for some of the best post-war city planning in Europe, led by Lord Abercrombie, and it had the leadership and the confidence to implement its Abercrombie plan to a greater extent than any other British city. However, it has had more than its fair share of economic and social difficulties, including the reduction of employment in the defence estate and the challenge of global markets to its manufacturing base. Plymouth has experienced problems encountered by many of our cities, including drug abuse, domestic violence, problems in schools and high levels of crime.
	My hon. Friend, however, has not brought a story of failure, despondency or despair to the House. I applaud the story that she has told us of civic leadership, vision, partnership and progress. It is perhaps unexpected to find the foundation of a vision for regeneration among planners and architects. For too long those professions have been the butt of cynical jokes, and have been blamed for many of our urban problems. However, I want to pay tribute to the work of planners and architects, not only in developing the Abercrombie vision of the 1940s and 50s but in revisiting it in the past few years. Mr. Mackay himself would be the first to say that he has built on the work of others, and I am pleased that the city council has not only developed a high-quality deposit local plan but has embraced the opportunity afforded by the new local development framework system to establish the foundation for its vision of the future.
	I pay tribute to the private sector architects and planners who have partnered David Mackay and Plymouth city council to give substance to that vision. That proactive, catalytic role is precisely what our new provisions for the planning system are designed to provide, and I encourage others to look at the example laid down by Plymouth. My hon. Friend has not just brought us an example of good town planning. Encouraged by the Deputy Prime Minister's strategy for sustainable communities, Plymouth aims to achieve sustainable growth. The Mackay vision has provided a spatial context for the wider growth agenda, and I particularly welcome the way in which the city and its partners have developed their agenda to embrace the city's wider economic and social needs.
	I commend the positive approach of the city council to its urban capacity study and the high proportion of new housing for the city that is planned either for brownfield land or for the existing urban envelope. Vibrant cities are places in which people want to live, not just on the periphery but in their hearts. The combination of the Mackay vision, the commitment of English Partnerships and the regional development agency, and the leadership of the city council will ensure that the city centre and the area around Plymouth's waterfront are once again places where large numbers of people can live and enjoy their lives. Bringing affordable housing, social housing and housing for more prosperous people back to the heart of the city is part of central planning for a sustainable community. It is part of the vision for urban renaissance.
	I accept, however, that the vision in Plymouth goes further. Tackling urban design and the delivery of housing is not enough if there are not well-paid, high-quality, long-term sustainable jobs for the citizens of the city. Work is in hand to build Plymouth's future economy, and I pay tribute to people with the vision to develop a science park. The Tamar science park at Derriford is recognised as one of the country's leading exponents of the science park agenda, and I am delighted that we have been able to support that success through the RDA and objective 2 programme investments in the science park. Partners in Plymouth quickly realised benefits for the economy that a large and successful hospital and a new medical school provided through intellectual capital, the opportunity for technology transfer and the incubation of new companies. Derriford Hospital and the Peninsula Medical School stand out for their commitment to building links to the wider city and its economy.
	Plymouth is fortunate to have one of the most impressive examples of a new university. As a contribution to urban renaissance, Plymouth must be almost uniquely fortunate in having a university with the ability to develop a 21st century campus right in the heart of the city. I recognise that the benefit goes well beyond anything that can be measured in student numbers or even in terms of research assessments. The contribution to innovation in a city such as Plymouth of a successful university is immeasurable. Its impact on aspiration and ambition in the city is incalculable. I pay tribute to the vice-chancellor, Professor Roland Levinsky, and his staff for the commitment that they show to partnering with Plymouth and growing its future together.
	I also recognise that Plymouth has academic assets beyond the university. In the Plymouth Marine Laboratory, the Marine Biological Association and the Alexander Hardy Foundation, Plymouth has a world centre of marine science expertise to be proud of. All these things mean that Plymouth is well positioned to respond to the Lisbon and Gothenburg agendas. Innovation and competitiveness have to be at the heart of growth economies, and I welcome the steps that Plymouth city council and its partners are taking to build on this foundation.
	I am struck by how committed Plymouth has been over the past 15 years to working in partnership. I applaud the lead that Plymouth's private sector took in developing the proposals and funding for the study undertaken by David Mackay. I welcome the strong sense of community evidenced by the local leadership of the Devonport new deal for communities initiative. I welcome the huge contribution made by the voluntary sector in Plymouth to the city's successful development of drug rehabilitation programmes. But none of those schemes would be enough if they were operating in isolation. The city council's vision of building with the chamber of commerce the Plymouth 2000 partnership more than a decade ago has proved far-sighted and beneficial. On this foundation has grown Plymouth's local strategic partnership. I look forward to the partnership moving in due course to grasp the opportunities of a local area agreement, through which the city will be able to extend programmes to improve the delivery of public service to the most disadvantaged; to narrow differentials; and to improve its performance on key floor targets.
	That is why I am enthused by the vision that my hon. Friend has brought us this evening. It is a true vision of a sustainable community. It is a vision for a community that is committed to increasing its prosperity while at the same time increasing equality of access to that prosperity, and which is interested in its physical environment, but also in the quality of the life of the citizens who live in that environment. It is the vision of a city driven not by remote bureaucracy, but by close partnership involvement of all its communities.
	That is a true vision of urban renaissance, and it is one that matches well with Government policy. In their manifesto report "Strong Economy, Great Cities", the Government have celebrated the urban renaissance that has been gathering confidence in our major cities over the past eight years. The report recognises that we must continue to give those cities the support they need to do even better, but it also emphasises our intention to apply the lessons of our successful regional cities to the next level of cities and towns in the country.
	We will strengthen the role of councils such as Plymouth to lead the transformation of their area through proactive approaches to promote prosperity and create sustainable communities. Our new planning policies are also helping. Planning policy statement 6 on planning for town centres aims to promote vital and viable town and city centres by encouraging positive planning to encourage growth and manage change. We are fully supporting Plymouth's renaissance in many ways, including, for example, through our investments through the regional development agency, English Partnerships, the English cities fund, objective 2, our neighbourhood renewal fund and the Devonport new deal for communities. They are supporting projects such as the Tamar science park, the Royal William yard and Millbay dock regeneration.
	We welcome Plymouth's keen and strong participation in our business improvement district pilot scheme and the overwhelming support of local businesses for the scheme, which offers the opportunity to make a real difference to the city centre environment, alongside the developments being taken forward there in support of the Mackay vision.
	My hon. Friend asked me for reassurance that Plymouth's potential is recognised by the Government and that it will have help in realising that potential. I reassure her that Plymouth is on Ministers' radar screens. I have already emphasised many of the ways in which we are already supporting and investing in Plymouth. I look forward to hearing the conclusions reached by Plymouth and its partners about how the city's delivery of sustainable growth can be taken forward.
	As my hon. Friend knows, Sir Michael Lyons is carrying out an independent inquiry into local government finance, and it is for him to decide what aspects to consider within his terms of reference.
	My hon. Friend has raised the question whether areas with rapidly growing populations are properly catered for by the local government finance settlement. She will know that the Government have already abolished the ceiling on grant increases from one year to the next, and we are now examining the use of forward-looking population projections in the settlement, which will help further. We expect to consult on possible options for grant distribution over the summer.
	My hon. Friend has raised the issue of civil service relocations. Addressing regional economic disparities is an integral part of creating sustainable communities, which is where we see our commitment to relocating 20,000 civil service jobs out of the greater south-east by 2010 playing its part. The Office of Government Commerce leads on the relocation initiative across government, and the ODPM's particular interest is in realising the potential contribution of any relocation to regenerating deprived areas. As such, when Departments consider where to locate staff, we will ask them to assess the impact on key elements, including jobs, skills and investment.
	My hon. Friend raised the issue of developing models of affordable housing. We want to offer as many people as possible the opportunity to own a home, and we are fully aware of the difficulties facing first-time buyers in the south-west. We are interested in hearing more about new and innovative ways of delivering affordable housing, and it would be useful if we could be kept appraised of any developments.
	We are consulting on proposals for improving our low-cost home ownership schemes. The document "Homebuy—expanding the opportunity to own" is available on our website, www.ODPM.gov.uk, and everyone is welcome to respond to that consultation and to set out their ideas in relation to our own. Indeed, I understand that CDS Co-operatives has discussed piloting the community land trust idea with English Partnerships.
	My hon. Friend asked me five questions, and the only one that I have not responded to is her kind invitation to visit Plymouth. If she will allow me a little time, because I am so new to my post, I hope that we can arrange a visit in the summer recess.
	Question put and agreed to.
	Adjourned accordingly at twenty-four minutes to Midnight.